News
National Insurance Raised by Rishi – but are there still savings to be made for Directors?
12 Apr 2022
By Paul Brown, Tax Partner & Director of Advisory at WR Partners
In his spring statement the Chancellor Rishi Sunak announced that the threshold for National insurance contributions for employees would increase to an annual amount of £12,570 from 1 July 2022. For most employees this impact will be automatically factored into their pay packets from July onwards.
However, for directors who typically take their reward from their company by a mix of salary and dividends the position requires a little more thought.
National Insurance
Directors have a specific treatment for National Insurance purposes – their level of contributions is assessed on an annual basis rather than for each pay period at a time. Because the threshold is changing from 1 July this means the annual threshold for directors takes into account 3 months at the lower rate and 9 months at the higher. The annual threshold for directors is therefore £11,908 for the tax year 2022/23.
This means that the maximum salary a director can take for the year to 5 April 2023 without paying employee’s National Insurance is £11,908. Importantly though, it should be noted that the Chancellor did not raise the threshold for employer contributions at the same time as he raised that for employees. The employer’s threshold remains at £9,100 for the 2022/23 tax year.
This means that paying a salary of £11,908 for the year would give rise to employer’s National Insurance on the difference between the salary and the threshold of £9,100. With a rate of 15.05% this would give an employer’s National Insurance bill of £422.60.
Employment allowance
The employment allowance can be claimed in certain situations to reduce the employers’ National Insurance bill by up to £5,000 (capped at the amount of employer’s National Insurance in the year). Many businesses will already be claiming this allowance because of other employees. However, it may be possible for smaller businesses to claim this allowance to offset against the additional National Insurance mentioned above if their employer’s National Insurance bill is currently less than £5,000.
One important exclusion to note, is where there is only one employee on the payroll over the employer’s National insurance threshold and that employee is a director – in this case the employment allowance cannot be claimed.
Corporation tax
If a director increases their salary to £11,908 per year, they may choose to reduce their dividends by the same amount as the increase, so their personal income tax position will most likely be unchanged. However, the increased salary (and any employer’s National Insurance) will be able to be offset against the company profits for corporation tax purposes.
Paying a salary of £11,908 rather than a salary of £9,100 will give a corporation tax saving of £533.52 while the tax deduction for the National Insurance will give a further corporation tax saving of £80.29. Overall, the company tax bill will be reduced by £613.91.
So, what does this all mean?
In most cases there is likely to be a small saving by increasing salary and reducing dividends for directors so that they take a total salary for the current tax year of £11,908. Based on the figures above, the overall saving will be £191. While this is not a trivial amount the question becomes whether the additional admin overhead of making the change outweighs any cash benefit that is obtained.
In a small number of cases, it may be possible for the employment allowance to be claimed to offset the extra employer’s National Insurance mentioned above. In these cases, the savings become more worthwhile, but care must be taken to ensure the conditions for claiming the employment allowance are met.
If you would like to discuss the alternatives available to you as a result of the National Insurance changes then please get in touch with your usual WR Partners contact.
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