A lot can happen in a year! This time last year, the UK had just come second in the Eurovision song contest, Liz Truss had no idea that she was going to be Prime Minister let alone only stay in office for 49 days, and we were all poised to celebrate The Queen’s Platinum Jubilee.
It was also only a year ago that the now Prime Minister was the Chancellor. During his two and half year stint as Chancellor, Mr Sunak had the arduous task of helping to see the country through a global pandemic and also the cost of living crisis. With inflation rising, to give low-income families a small tax-break, he announced in his March 2022 Spring Statement that the National Insurance Primary Threshold would be rising to £12,570 per year from July 2022. This means that an employee can now earn £12,570 per year without paying any tax or national insurance (NI).
Directors are almost always classed as employees of the company and therefore, can now be paid a salary of £12,570 per year without any deductions for tax or national insurance. In fact, because the salary is a tax-deductible expense in the company, the overall tax saving of paying yourself a salary at this level instead of a dividend is £1,850 per year!
Setting your salary at this level does mean that there is a small amount of Employers National Insurance for the company to pay each year. However, where there is more than one employee included on the payroll of your company, it may be possible to claim the annual employment allowance which will cover that bill. For sole directors though, the company’s NI bill will be due in January / April 2024 (£479).
A director who is also a shareholder is in a unique position as they can design a remuneration package which means they can draw cash from their companies in the most tax-efficient manner. Depending on the individual’s circumstances, such a package is likely to be a combination of a director’s salary and the declaration of regular dividends. Other things such as employee benefits (e.g. company car; private medical insurance) or rental income would also need to be taken into consideration when devising such a package. Here at Hive Business, we aim to be proactive and help Directors set a dividend plan at the start of the tax year which formalises their drawings in the most tax-efficient manner. If you’d like to discuss this further, please get in touch.
On a slight sidenote, if you’ve yet to take the incorporation leap, very often the benefits outweigh the risks of keeping the status quo. Get in touch if you’d like to discuss either incorporation or tax planning. Please call us on 01872 300232 or email hello@hivebusiness.co.uk.
