A note for paid subscribers.

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 2020/21:

  • 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 £120 per week.
  • Employee’s primary Class 1 contributions are paid when pay exceeds £183 per week and Employer's secondary Class 1 contributions are paid when pay exceeds £169 per week.
  • So, the optimum amount to qualify for benefits that an employee or director needs to earn and avoid employee NICs is:
    • Between £120 and £183 per week or between £6,240 and £9,500 per year.
  • If the employer wishes to avoid Employer NICs, this is reduced to £120 to £169 per week or between £6,240 and £8,788 per year.
  • Unlike previous years, for 2020/21 the primary and secondary NIC’s thresholds are different.

Taking advantage of the increased £4,000 NICs allowance in 2020/21

  • The £4,000 allowance is not available for companies where the sole director is the only employee. Prior to April 2020, the allowance was £3,000.
  • If an employer with one employee (other than a sole director) would rather pay a higher salary in order to claim the £4,000 Employer's NICs allowance, it could pay a salary of up to £37,770. The employee would be subject to NICs and Income Tax, but the employer’s NIC on this salary would be covered by the allowance.
  • From April 2020 access to the allowance is restricted to employers with an employer NICs bill below £100,000 in the previous tax year.

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 may be 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?

Don't overlook the requirements of the National Minimum Wage. There are special rules for directors.