Salary choices for the new tax year
The start of the new 2014/15 tax year is only a month away. One thing to look forward to, if you’re an employer, is the new Employment Allowance, worth up to £2k to every business running a payroll. It works by effectively exempting the first £2k of Employer’s NI that your business would have to pay over to HMRC for 2014/15. If we prepare payroll for you we’ll automatically take the Allowance into account when telling you how much to pay to HMRC in respect of PAYE and NI.
One interesting angle on the new Employment Allowance involves decisions over how much salary a director should take. Up until now, we’ve automatically suggested that directors take a salary at the level NI threshold. For the year just ending, this equates to £641 per month. The equivalent monthly figure for 2014/15 will be £663. Let’s just examine why this is the case.
Firstly, directors’ duties are not covered by minimum wage legislation, so there’s no problem with paying such a low salary in this respect. Secondly, at the Primary Threshold, there’s no NI to pay – either Employee’s NI or Employer’s NI. Thirdly, all pension rand benefits rights are maintained, despite no NI actually being paid.
However, the level at which Income Tax kicks in is currently £9,440 (£787 per month), rising to £10,000 (£833 per month) in 2014/15. You’ll recognise this as being the Personal Allowance – the amount of income you can receive without paying any Income Tax. Using the 2014/15 tax and NI rates, this is why we have always suggested sticking to the NI threshold (£663 per month) in terms of a director’s salary, rather than the tax threshold (£833 per month)
On salary between £663 and £833 (£170) there will be an Employee’s NI charge of 12%, so that’s £20.40. There will also be an Employer’s NI charge of 13.8% (23.46). The Employer’s NI is tax-deductible for the employer company, so 20% of the £23.46 is saved in Corporation Tax (£4.69). So, the true, after-tax cost of the additional NI here is £20.40 plus £23.46 minus £4.69 – that’s a net cost of £39.17. The company will then save Corporation Tax on the additional £170 director’s salary payment of 20%, so that’s a saving of £34.00. You can see here that the £34.00 saving is not quite enough to offset the net NI cost of £39.17, so on these figures £663 is a more efficient salary to take than £833.
However, let’s assume that the Employment Allowance is available to your company in 2014/15 and that this will cover the Employer’s NI due on the director’s salary. The only NI payable should the director take a salary of £833 would be the Employee’s NI of £20.40. The Corporation Tax saving of £34.00 would now be greater than the extra NI payable, and so the £833 salary would work out to be more efficient.
So, we have a solution. If your company is going to have enough Employment Allowance remaining (after taking into account the Employer’s NI due on salaries to other staff) to cover the Employer’s NI on the director’s salary, it’s worth taking a salary of £833 in 2014/15. If the company is already over the Employment Allowance limit (because of Employer’s NI due on other staff salaries) then you’re better off taking a director’s salary of £663. Bear in mind that, if you do take £833 per month, then the Employer’s NI on this works out to be £23.46 per month (that’s £281.52 for the full tax year). So, if you go down this route you’ll be using up £281.52 of the £2k Employment Allowance on your director’s salary. The big question is, then, whether or not the Employer’s NI on all other salaries exceeds £1,718.48. as long as it doesn’t, there will be enough Employment Allowance left to cover the Employer’s NI due on your salary.
If we prepare your payroll, we know how much Employer’s NI you have paid in 2013/14. Assuming that you’re going to be employing the same staff in 2014/15, we therefore have a pretty good idea of what your Employer’s NI liability will be next year, too. What we don’t know, is whether you’ll be upsizing or downsizing your workforce in 2014/15, so if you want us to take possible changes in Employer’s NI liabilities into account, drop us an email to let us know the plans for your workforce in 2014/15. Otherwise, we’ll base the director’s salary recommendation on 2013/14 data.
Incidentally, if a company has control of another company, or both companies are under the control of the same person or persons (for example, companies linked in a group), these companies are connected. Where this is the case, you will only be entitled to one Employment Allowance to use against one PAYE scheme (regardless of how many PAYE schemes you operate). It is up to you to nominate which PAYE scheme to claim the allowance against.