At a glance
What is the optimal monthly or weekly salary that can be paid by an employer without incurring a liability for employer or employee National Insurance Contributions (NICs)?
Look up National Insurance rates for 2016/17:
- It is important that the employee or director is paid over the Lower Earnings Limit (LEL) for NICs in order to qualify for certain state benefits. The LEL is £112 per week.
- Employer's secondary class 1 contributions are paid when pay exceeds £156 per week.
- So the optimum amount to qualify for benefits that an employee or director needs to earn and avoid NICs is between £112 and £155 per week or between £5,824 and £8,060 per year.
Taking advantage of the £3,000 NICs allowance in 2016/17
The £3,000 allowance is not available in 2016/17 for companies where the sole director is the only employee.
If an employer would rather pay a higher salary in order to claim the £3,000 Employer's NICs allowance, it could pay a salary of £29,851 or more. The employee would be subject to NICs and Income Tax, but the employer’s NIC on this salary would be covered by the allowance.
See Employers’ NIC allowance for the different variations.
Tax planning for company owners
Tax saving in the UK also involves managing the increased burden of tax penalties and administration. Payrolls are now filed under Real-Time Information (RTI) reporting. Due to automatic penalties under RTI, most employers will see the benefit from taking a route which minimises administrative burdens and the risk of penalty.
An employer can register an annual scheme for RTI. This is suitable for owner-managed companies where the director(s) pays a one-off salary, perhaps within the limits suggested above.
What is the optimal level of salary and dividend to pay and still remain a basic rate taxpayer?
For workings see Do I pay a salary or dividend 2016/17?
Don't overlook the requirements of the National Minimum Wage. However, there are special rules for directors