Possible NIC & Tax Saving on Director's Salary
As we move into 2016/17 tax year, the personal tax allowance has risen to £11,000 per annum.
This has created a reasonably significant difference between the National insurance, primary threshold. The starting point at which employees pay NI contributions. £155 per week or £8,060 per year.
This has created the situation for Directors, who pay themselves on the basis of small salary to create a small tax saving.
Employee NIC is at a rate of 12% and employers rate is 13.8%.
However, if the employer’s payroll Employers NIC costs does not exceed the £3,000 Employment Allowance, then there is a potential tax saving by paying up to the personal tax threshold.
The trick is that Employers NI will not be payable as this will be covered by the Employers Annual allowance.
There will be small amount of Employees NIC to pay, (12%) throughout the year, but the additional; salary will attract corporation tax relief at 20% .
So theoretically there is an overall net saving, of nearly £250 per director.
It needs careful thought however, as there are pitfalls.
1. If the company has a sole director who is the only employee, then Employment Allowance is now completely denied. So the salary should stick at the primary threshold (£671/month).
2. If the Employment Allowance is fully used during the tax year, then the employers NI on the additional salary, will just soak up the Allowance quicker, with less, or possibly no benefit.
3. If the company makes a taxable loss, then there is no real benefit, as there won’t be any corporation tax to relieve the additional salary. (although there is possible loss relief)
4. The NI costs will be paid possibly monthly, but the possible benefit will come many months in the future, when the corporation tax is paid.
In conclusion, it has to be considered whether for a relatively small saving, it is worth increasing the salary to the personal allowance threshold, for some possible benefit, many months in the future.
