Earlier this year, the government set out the new National Insurance thresholds for 2020-21, with the level at which taxpayers start to pay National Insurance Contributions rising by more than 10 per cent to £9,500 per year for both employed and self-employed people. This new National Insurance threshold has seen benefits for over 31 million taxpayers across the country, including company directors.
For company director shareholders whose remuneration structure is set up based on a low salary and dividends, there is an optimum amount of basic salary for National Insurance purposes. This is £9,500 gross per annum based on the prevailing rates for 2020-21. Above this level, an Employee National Insurance charge of 12% applies up to the UEL (upper earnings limit) of £50,000 per annum.
This applies even if you’re the director of your own company and the only employee.
To put this into context, for clients who we don’t manage the payroll for, they might be paying themselves £12,500 p/a (tax-free personal allowance) but this isn’t always entirely tax-efficient. This is because it will incur a small amount of Employee National Insurance and reduce availability of remaining allowance for other income streams such as interest on Directors’ Loan Accounts.
By increasing your director’s basic salary your company could save in the region of £165 corporation tax per director per year. If your business hasn’t increased your director salaries for a few years so this is a great opportunity to increase them now.
How to efficiently pay directors
Payroll software is an efficient method to work out the National Insurance due. Whether you take on this task yourself, or your external accountant manages this for you, there are 2 different ways of doing this, which could be adapted during the tax year depending on the software used.
Standard annual earnings period method
If your directors are paid irregularly, each time you pay them, you will need to work out their National Insurance for their total pay over the tax year to date, including bonuses. Then, to calculate what contributions they now owe, take off the total employee National Insurance they’ve paid so far this year.
If your directors who are paid regularly, each time you pay them, you will need to work out their National Insurance only on their pay for that particular period, including bonuses. Then, at the end of the tax year, use payroll software to work out whether more employee National Insurance is due and subtract it from their last payment.
Find out more
If you would like a consultation to explain how you can ensure your directors are being paid in the most efficient manner, and within the National Insurance Threshold, then click here to contact us for a free advisory session.
Please note, the information provided in this article is for information only. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss caused by any person acting or refraining from action as a result of the material contained in this article can be accepted.