Tax efficient salaries

Tax efficient salaries for Tax year 2015-16

Tax efficient salaries for 2015-16 (i.e. the level at which no PAYE and NI is payable) would typically be set at the level of £671.67 per month, which is £8,060 per annum.

However, the government’s Employment allowance scheme will continue (see section below for further information), which means that the first £2,000 of employers National insurance will not be payable by most employers.  This means that a higher tax efficient salary can be paid in 2015-16 because although employees NI will be due at a rate of 12.0%, there would be a 20% corporation tax saving.  This means that companies subject to corporation tax should consider paying salaries to directors/shareholders which are up to the level of the personal allowance.

Recommended salaries for 2015-16

Based on the employer allowance being available, this means that a tax efficient salary of £10,600 per annum should be paid.  This equates to £883.33 per month.  At this salary level there would still be some employee’s NI due (about £205 per annum), but no employers’ NI as it falls within the £2,000 limit. It is not worthwhile to increase salary above £10,600 as above this amount income tax becomes payable.

General advice vs specific situations

It should be remembered that ALL employment income and/or pension income will be aggregated when calculating annual earnings, and so it might mean that there is no need to provide employment to a spouse/civil partner as the personal allowance can be used up against the other income.  If you have more than just one source of income, then please discuss with your usual MG Group contact to ensure that you are on the most tax efficient salary level.

Employment Allowance continues in this tax year (2nd year of operation)

The government continues the successful Employment Allowance (which commenced on 6 April 2014).

It means that the first £2,000 of employers’ NI contributions will not be payable by the employer. Employees NI contributions will still be payable once the primary threshold is exceeded, but not secondary contributions (employer contributions).

For close companies (especially personal service companies) it means that there is scope to increase the amount of tax efficient salary that is paid to directors and perhaps employees of the business.

MG Group’s view is that this is a very welcome generous relief being provided to businesses.  The timing has likely been set to give a boost to business owners as we come out of the recession and also in the run up to the general election next year.

Payroll and Real Time Information (RTI) from 6 April 2015

Further to the “roll out” of RTI in tax year 2013-14, HMRC are now becoming much stricter with effect from 6 April 2015 to ensure that payroll is operated in the manner required by RTI.  This means that pay slips should be issued and the payroll submission made to HMRC before payment of salary is made to employees.  This means it is important to set up a forecast of expected salary payments during the tax year such that all payments which are capable of being characterised as salary are treated as such, rather than treated as dividends. 

For most clients, this would mean that salary of £10,600 will be paid during the year 2015-16.  Please see above for the rationale for this.  Also, it means that we need to establish a payment frequency for payroll (this could be monthly, quarterly, half yearly or annually), but the important consideration is to know in advance how much is to be taken out and when so that cash flow will be available in the business to finance the salary payments.

One Director and one Non-Director in companies

In many small businesses, there will be a husband and wife team or civil partnership team working together. In many cases only one of the couple are controlling and directing operations of the company and therefore only one person will be legally in the position of a Director of the company.

Payroll for directors and non-directors is run slightly differently – in that national insurance contributions for Directors is calculated on an accruals basis – this will give some anomalies in earlier months of the tax year, in that the non-director person will pay NI in each quarter of the fiscal year, but the Director person will only pay NI in the final period.  It is still tax effective to have both parties on the £883.33 gross salary, but please note that regular payments of NI will be required under this set up.

MG GROUP Recommended salary payment dates

Please see Appendix A at the end of this document for recommended salary payment dates.  These will be the default dates that we use to run your company payroll unless we have written instructions from you to do otherwise.

No Employers’ NI contributions payable for Under 21’s

New from 6 April 2015 is that employees under the age of 21 will not have Employers’ NI calculated on their earnings.  This is to encourage employers to take on more apprentices.  There is a planning opportunity here to employ children in family companies, but it is essential that the worker is completing work and tasks which are commensurate with the amount they are being paid.  So long as the monthly earnings of the employee are less than the Upper Secondary Threshold of £3,532, then no Employers NI will be due.  It is important to keep records to show the work that is being completed, so that the salary can be justified in the event of an HMRC enquiry.

NEXT STEPS:

The next step is to consider the above factors and then liaise with your usual MG Group contact to ensure that your employment taxes are managed in the most efficient way during the tax year 2015-16.

APPENDIX A

If only quarterly salary payments are to be made, then payments would be for periods 3, 6, 9 and 12 (these are shown in bold above).

If half yearly salary payments are to be made, these would be made on 30 September 2015 and 31 March 2016.

If only annual salary payments are to be taken, then this would be taken out on 31 March 2016.

Should you have any questions regarding this document, please do not hesitate to contact your usual MG Group contact.