From January 2015 (“Month 10” of 2014/15 tax year), many directors of small companies taking salaries up to the personal allowance will find they’re suddenly stung by NICs when they weren’t in the previous month…what’s happened?
You’ll see the image above for month 10 of 2014/15 for a one person company paying £833/month. Boxes highlighted in red above show salary, employEE NICs suffered, employER NICs added, but then that the employment allowance effectively waives the employER NICs. Net effect only the employEE NICs are suffered.
For the last few tax years (up to but not including 2014/15) accountants were generally agreed on what the “best” salary to take was, when you were in full control of the company, hence able to fully choose your salary/dividend mix. It’d be the NIC threshold, which is typically a bit lower than the personal allowance.
In 2013/14, this amount was £641/month. Paying slightly above this wouldn’t trigger a personal tax liability, but it would trigger NICs…both employER and employEE. In the majority of cases, suffering both these NICs would outweigh the corporation tax saving of the slightly higher tax, so paying more was counter-productive.
How is 2014/15 different?
In 2014/15, the equivalent of the above £641/month is £663/month. However, a small spanner was thrown into the works in the form of the “employment allowance”. This basically meant that the first £2k of employER NICs suffered by a company would be waived. Therefore paying slightly above £663/month does still lead to employEE NICs, but no employER ones. Geeky calculations show that there is a modest overall tax saving to be had by doing this, as the corporation tax saved slightly exceeds the employEE NICs suffered.
Therefore for the first year in a while, a lot of micro business owners are taking a salary that does lead to some NICs being suffered. Worth also mentioning here that many more won’t as they’ll have gone for the “easy” option of paying £663/month…very slightly more overall tax paid, but many argue not worth it for the extra admin. There is no “right” answer.
£833/month means that over the year, the NIC threshold will be breached, but it’s still below the personal allowance, meaning no income tax is suffered. If the salary were to go above £833/month, then income tax would be suffered as well, making it not worthwhile from a tax minimisation perspective.
How do NICs work for employees?
EmployEE NICs are a deduction from the gross salary, so the employEE foots the bill (hence the name). EmployER NICs are an addition to the gross salary, so the employER foots the bill (hence the name).
For “normal” employees these are calculated on a month by month basis, with whatever was paid in previous months being irrelevant in the current month’s calculation. Therefore NICs on “normal” employees tend to be fairly constant throughout the year, obviously changing a bit if/when salary increases/decreases.
What about directors?
To prevent some quirky ways those in charge could exploit the above (mainly by paying all their annual salary in one month each year), HMRC decided that director NICs should be done on a cumulative basis.
Each month is no longer looked at in isolation, you’re given a certain allowance from the beginning of the tax year, with no NICs suffered until it’s reached, then NICs suffered on everything following that.
For those paying £663/month, even at the end of month 12 they won’t quite breach this threshold (they’ll be trivially below it).
For those paying £833/month however, the threshold will be met part way into month 10. Therefore whilst you’d have been happily paying £833 gross pay = net pay for the first 9 months, suddenly employEE NICs are suffered in month 10, and indeed they will be in months 11 & 12 too.
How do I pay this?
There’s a variety of ways you can pay this, see here. If the company is small, the liability can be paid quarterly, meaning just one payment required in April for the NICs suffered in Jan-Mar inclusive.
Yuck, wish I didn’t have this
Potentially if you’ve been paying £833/month and now decide you’d rather not have the faff of making deductions and paying them over to HMRC, then if your month 10 payroll hasn’t yet been filed, it’s not too late.
If you prepare and file payroll for months 10-12 with a salary reduced to £153/month, you’ll end up below the NIC threshold. Reasons being:
12 x £663 = £7,956 (below NIC threshold)
12 x £833 = £9,996 (above NIC threshold)
9 x £833 + 3 x £153 = £7,956 (below NIC threshold)