The days are getting longer, the weather is getting warmer, and there are blossoms on the trees. It’s official, Spring has sprung! And unfortunately, this year Spring comes with a touch of doom and gloom with the rising cost of living and an unwelcome increase in national insurance to take account of the new health and social care levy.
To soften some of the blow, the Chancellor announced in the Spring Statement that the annual National Insurance Primary Threshold would be rising to £12,570 per year – meaning an employee could earn that without paying any tax or national insurance (NI).
But the question is, when is £12,570 per year not tax and NI free? And the answer to that is, when the threshold is increased part way through a tax year. Because the threshold isn’t being raised until 6 July 2022, the actual gross salary that an individual can earn in 2022/23 without paying any tax and NI is just over £11,900.
One very important thing to note is that the employer’s national insurance threshold (known as the secondary threshold) is not changing. Therefore, there will be £422 of employer’s national insurance to pay on a salary of £11,900 per year. It’s also important to note that a salary of over £10k per year would mean that an employee would qualify for automatic enrolment in a workplace pension scheme (although they could elect to opt-out).
Being a director of your own company means that we can design a remuneration package that works for you and is the most tax efficient. Normally that means that you take a minimal salary from the company and a regular dividend payment to cover your living expenses. If we increase your salary to the suggested £11,900, although there’s a small amount of employer’s national insurance to pay, there are higher corporation tax savings. In fact, there is still a net tax saving of £190 per year if we increase your 2022/23 salary. The overall saving on paying a directors salary of £11,900 is around £1,800!
In conclusion, although the NI threshold isn’t increasing until July, the calculation for Directors NI is dealt with on an accumulated basis and therefore, we can increase from April 2022 to £992 per month and still avoid employee national insurance contributions. If you’re a sole director, the employer’s national insurance liability will then fall due in April 2023.
If we run your payroll, we’ll automatically increase your salary to the higher amount from April 2022. If we don’t run your payroll, why don’t we?!
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. My colleague, Simon Vincent, recently discussed the tax opportunities available in this area and outlined the strategic tax planning you should be thinking of.
If you would like some information about incorporation or our payroll services in general, please call us on 01872 300232 or email hello@hivebusiness.co.uk.
