If you trade as a limited company, it’s crucial to have directors on the payroll to maximise tax efficiencies. Although there are not any significant changes for the year 2024/25 from the year preceding, this blog will help if you are new in business, or just want reassurance you’re doing the right thing.
Directors can earn £12,570 in the 2024/25 tax year without paying any employee National Insurance. For more information on the updates to National Insurance, you can read about the rates and thresholds for employers in 2024 /25 on the government website or talk to our accounts preparation experts today.
The same as last year, in the vast majority of cases we would recommend paying £12,570 in the tax year. The reasons for this and tax consequences will be highlighted below.
The primary threshold (rate in which employees/directors pay NI) is £12,570 for the tax year. If your earnings do not exceed this amount, then no employee National Insurance will be payable.
The secondary threshold limit for NI is lower than that of the primary threshold and stands at £9,100. If the only person on your payroll paid £9,100.00 or above is a director, then you will not qualify for the employment allowance of £5,000 in the 2024/25 tax year. Therefore, any earnings over £9,100 will be subject to Class 1 National Insurance at a rate of 13.80%.
This equates to £479 payable in total in the 2024/25 tax year and this cost is borne by the company.
We appreciate that by recommending you pay yourself £12,570 through a PAYE scheme means you then pay National Insurance. The reason for this is the saving in corporation tax. As long as the director’s salary is reasonable for the duties performed for the company then it is deductible from the taxable profits of the company.
To prevent paying national insurance, you could only pay yourself £9,100. If you increase the salary by £3,470 to £12,570, that will equate to a corporation tax saving of £659. Then, on top of that, the Employer National Insurance paid by the company of £479 is also an allowable deduction, saving an additional £91 in corporation tax.
In summary, the company would have to pay an additional £479 in National Insurance, but the saving in corporation tax would come to £750, leaving you with an additional £271 in the bank.
The above is assuming you pay corporation tax at 19%. If, however, your taxable profits exceed £50,000, lower if you have associated companies, then your savings will be greater. We know this is only a small saving, but in these times, every little reduction on your tax return helps!
There are two scenarios under this bracket, and this depends on whether you utilise the £5,000 employment allowance.
Under this option, you would be in the same bracket as a sole director with no employees, so an additional Employer National Insurance liability would be incurred of £479, but the corporation tax saving of £750 would outweigh this.
Again, you would be better off paying the £12,570 in the current tax year as you will pay £271 less in tax.
If your employer’s National Insurance bill in the 2024/25 tax year is expected to be less than £4,521, then you can pay yourself £12,570 without incurring any additional Employers’ National Insurance.
Please note the above is based on a one director company. For every additional director, deduct an additional £479 from the £4,521 expected Employers’ National insurance liability above.
For this situation, the best option is to pay the £12,570 salary as you would pay £659 less in tax. Again, calculations based on your CT rate being 19%. If you pay at a higher rate, your savings would be greater.
In making the above change to your salary as a director, there are also the following implications you need to take into account:
If we run the payroll for your company, you do not need to worry about the above as we use Xero accounting software to automatically ensure the amount you are paid is updated to the most tax-efficient amount.
It’s never too late, you can implement it anytime in the tax year and even run an annual pay run!
We do hope you found the above helpful and if you have any queries at all about Directors National Insurance 2024/2025 or any of our services, please do not hesitate to get in touch with our team today.
Michael Broome FMAAT ATT
Email: michael@sidaways.co.uk
Tel: 01392 360008
Sidaways Limited – Chartered Accountants in Exeter
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Dan Routcliffe
Email: dan@sidaways.co.uk
Tel: 01392 360008
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