Could you increase your salary and pay no additional tax?

Payments to employees and directors are subject to Income Tax and Employee’s National Insurance. In addition, the employer may need to pay Employer’s National Insurance.

In March 2022, in the Spring Statement, the Chancellor increased some of the National Insurance thresholds for the 2022-23 tax year (and beyond). This means that employees and those that are self-employed will pay less National Insurance because less of their income qualifies as chargeable to National Insurance. 

This was great news, but it affects different businesses in different ways.

Employees (non-directors)

From 6 July 2022, all non-director employees will see an increase in their take-home pay because the amount of National Insurance that they currently pay will reduce.

The primary threshold is the technical name given to the ‘level’ at which National Insurance becomes chargeable on salaries. On 6 July 2022, this threshold will increase from £9,880 per annum to £12,570 per annum. All things being equal, this means that £2,690 of an employee’s salary will no longer attract a National Insurance charge and, at a rate of 13.25%, this equates to a tax saving of £356 per year.

This will be calculated automatically by the employer’s payroll software and therefore, there should be nothing further to do. Employees will notice an immediate benefit.

Directors

The above change also applies to Directors from 6 July 2022. However, the calculation for National Insurance for directors is a little different to non-Directors as it is calculated annually as opposed to monthly. The annual limit for directors has been set at £11,908. This is equivalent to three months at £9,880 (old primary threshold rate) and nine months at £12,570 (new primary threshold rate).

Where typically a director is paid a low salary and a high dividend, the change introduced by the Chancellor provides an opportunity to increase the Director’s annual salary with no additional employee’s National Insurance charge and, in addition, the company will benefit from a Corporation Tax deduction on the increased salary. 

For example, if a director is paid £758 per month, he or she could increase the monthly salary to £1,048 which is an increase of £290 per month. There would be no additional deduction for employee’s National Insurance and the company would benefit from a Corporation Tax saving of £55.10 per month on the increased gross salary.

It is not all good news however, as the increased rates introduced by the Chancellor did not extend to cover Employer’s National Insurance. As a result, any increased salary would be subject to additional Employer’s National Insurance, but you need to bear in mind that many small businesses (those that employ more than one single director) are entitled to the Annual Employment Allowance which is effectively an annual credit offset against the first £5,000 (2022/23) Employer’s National Insurance liability.

Using the above example, the table below sets out the cost of a £290 increase in a Director’s take home pay under the two scenarios:

Conclusion

Depending on your precise circumstances, there may be an opportunity for you to extract additional funds from your company, tax and national insurance free. To find out how Joh Kerr can help, please feel free to call us.

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