As changes to Directors National Insurance start to take place, it’s crucial for limited company directors to stay informed about the changes that may impact their earnings and financials. One significant difference for the year 2023/24 is the adjustment in the Directors National Insurance threshold.
Directors can now earn £12,570 in the 2023/24 tax year without paying any employee National Insurance, an increase on the £11,908 in place last year. As expected, this changes the advice provided to directors, which we will outline in this blog. For more information on the updates to National Insurance, you can read about the rates and thresholds for employers in 2023 /24 on the government website or talk to our accounts preparation experts today.
Last year, our advice to company directors was to pay themselves a salary of £11,908 a year to avoid paying any National Insurance (NI). However, with the increase in the threshold for employees and directors’ National Insurance, we would now recommend paying £12,570 in the tax year, in most cases.The reasons for this and tax consequences will be highlighted below.
Unlike last year, the primary threshold (rate in which employees/directors pay NI) has been £12,570 for the whole tax year. Although that threshold was in place last year, it was only from the 6th July 2022. As it was mid-way through the year, you had to apportion the increase. If your earnings do not exceed this amount, then no employee National Insurance will be payable.
The secondary threshold limit for NI is still 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 2023/24 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 2023/24 tax year and this cost is borne by the company.
We appreciate that by recommending you pay yourself enough through a PAYE scheme then means you 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 2023/24 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 in the 2023/24 tax year 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 increase.
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 not too late, you can implement it anytime in the tax year!
We do hope you found the above helpful and if you have any queries at all, please do not hesitate to get in touch with our team today.
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Dan Routcliffe
Email: dan@sidaways.co.uk
Tel: 01392 360008
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