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Optimal Salary when NIC Employment Allowance is not available

Shared from Tax Insider: Optimal Salary when NIC Employment Allowance is not available
By Jennifer Adams, June 2022

In this sample tip from the newly updated guide ‘101 Practical Tax Tips’, Jennifer Adams looks at the optimal salary when NIC employment allowance is not available. Learn more tax saving ideas and save 30% on this guide today.

The optimal salary level depends on whether the National Insurance employment allowance is available to shelter any employer’s National Insurance liability that would arise on the payment of the salary. 

The NIC employment allowance is not available where the sole employee is also a director. This is usually the case for a personal company.  

Where the employment allowance is not available and the director is over the age of 21 (and none of the other upper secondary thresholds for employers apply), for 2022/23, the optimal salary (assuming the personal allowance is not used elsewhere) is equal to the primary threshold.

For 2022/23, the primary threshold is set at £190 per week (£823 per month) for the period from 6 April 2022 to 5 July 2022 and at £242 per week (£1,048 per month) for the period from 6 July 2022 to 5 April 2023. The annualised primary threshold is £11,908 for 2022/23. It should be remembered that directors have an annual earnings period for National Insurance purposes. 

Although the maximum salary that can be paid without having to pay any National Insurance (employer’s or employee’s) is £9,100 – equal to the secondary threshold – the fact that the salary and employer’s National Insurance are deductible for corporation tax makes it worthwhile paying a salary equal to the annualised primary threshold of £11,908 and paying employer’s National Insurance at 15.05% to the extent that the salary exceeds £11,908. The corporation tax deduction at 19% outweighs the National Insurance cost on the higher salary at 15.05%. 

However, once the salary level reaches the primary threshold of £11,908, a liability to employee’s National Insurance contributions arises, so that employee contributions of 13.25% are payable to the extent that the salary exceeds £11,908, as well as employer contributions of 15.05%. Employer’s National Insurance contributions are deductible for corporation tax, meaning the effective rate after allowing for corporation tax relief is 12.19% (15.05% – (15.05% @ 19%)).

The combined NIC hit on the excess above £11.908is more than the corporation tax relief of 19% on the salary and employer’s National Insurance contributions, so it is not efficient to pay a salary of more than £11,908 for 2022/23 (unless the employment allowance is available (for which see Tip 26) or the director is under the age of 21 or another upper secondary threshold for employers applies). 

There is some administration involved in paying the employer’s National Insurance over to HMRC. Consequently, the decision may be made to forgo the small savings achieved by paying a salary of £9,880 and instead pay a salary of £9,100, which can be paid free of any National Insurance, to save the associated administration. However, the administration burden can be minimised by having an annual PAYE scheme. 

It should be noted that the rates of primary and secondary Class 1 National Insurance contributions are increased by 1.25% for 2022/23 only pending the introduction of the Health and Social Care Levy. Consequently, the main primary rate is 13.25%, the additional primary rate is 3.25% and the secondary rate is 15.05% for 2022/23 only.

The rates are due to revert to, respectively, 12%, 2% and 13.8% from 6 April 2023 when the Health and Social Care Levy comes into effect. However, employees and employers will also be required to pay the Health and Social Care Levy of 1.25% of earnings liable to Class 1 National Insurance contributions from this date. 

Looking ahead, from 1 April 2023 the corporation tax regime is reformed and where profits are higher than the lower limit (£50,000 as divided by the number of associated companies plus one), corporation tax will be payable at a rate higher than the current rate of 19%.

Where profits exceed the upper limit (£250,000 divided by the number of associated companies plus one), corporation tax will be payable at the rate of 25%. The rate at which corporation tax is paid will affect the calculation of the optimal salary level. 

Optimal Salary Where NIC Employment Allowance Is Not Available 

Helga is the director and sole employee of her personal company. As such her company is not entitled to claim the employment allowance. She is aged 42. 

She wants to pay a salary for 2022/23 which is sufficient to ensure that the year is a qualifying year for state pension purposes and wants to know the level at which she should set her salary. For the year to be a qualifying year, she must pay a salary of at least £6,396 for 2022/23. 

However, she can increase the salary that she pays herself to £9,100 (the level of the secondary threshold for 2022/23) before any National Insurance is due. It will be beneficial to pay a salary equal to the primary threshold for 2022/23 of £11,908, as while paying an additional 0 to increase the salary to £11,908 will incur an employer’s National Insurance liability of £422.60 (£2,808 @ 15.05%), the additional salary and associated National Insurance of £3,230.60 (£2,808 + 422.60) is deductible for corporation tax purposes, reducing the corporation tax bill by £613.81 (£3,230.6 @ 19%) – a net tax saving of £191.21 (£613.81 - £422.60)). 

Once the salary exceeds the annual primary threshold of £11,908, employee National Insurance is also payable at 13.25%, meaning that paying a salary in excess of this is not worthwhile as the National Insurance (employee’s and employer’s) on the additional salary outweighs the corporation tax saving on the salary and employer’s National Insurance at 19%. 

In this sample tip from the newly updated guide ‘101 Practical Tax Tips’, Jennifer Adams looks at the optimal salary when NIC employment allowance is not available. Learn more tax saving ideas and save 30% on this guide today.

The optimal salary level depends on whether the National Insurance employment allowance is available to shelter any employer’s National Insurance liability that would arise on the payment of the salary. 

The NIC employment allowance is not available where the sole employee is also a director. This is usually the case for a personal company.  

Where the employment

... Shared from Tax Insider: Optimal Salary when NIC Employment Allowance is not available