March 2017 will be the last payroll run of the 2016-17 tax year. It is therefore not too late to do some year tax planning.
Directors, unlike other employees, have an annual earning period for salary calculations. It is therefore possible to do a salary adjustment in March 2017 and effectively spread any year-end salary adjustment throughout the tax year for the purposes of working out any tax and National Insurance due.
Tax efficient gross pay levels
If a company pay its director a salary up to £672 pm in the current tax year, it will create a Corporation Tax deductible expenses but will not cause any income tax to be paid by the employee (assuming the only sources of income to the director is income from their company). At this level, the director accrues various state benefits e.g. a qualifying year towards their state pension. There is no National Insurance cost to either the employee-director or the employer.
At the above level of salary, of £8,060 pa, this leaves £2,940 of the annual income tax personal allowance of £11,000 pa available and often unused by owner-managed businesses.
Where a company pays its director above £8,060 pa then National Insurance is due on the excess above this level. Employers pay National Insurance at 13.8% and employees pay 12% on the excess (up to £43,000).
Most small companies can fully recover the employer’s National Insurance at 13.8% by taking advantage of the Employment Allowance of £3,000 pa. This permits the first £3,000 of employer’s National Insurance each tax year to be deducted from total PAYE due to H M Revenue & Customs. This effectively therefore means that by paying above the £8,060 level and up to £11,000 pa that a company can save net tax of 8% (Corporation Tax of 20% less 12% National Insurance).
However, if other taxable income exists or it can be ‘created’ e.g. charging a use of home as office charge, extracting a small self-employment business from the main limited company etc then it is better to keep the salary at £8,060 pa and use up the £2,940 of unused personal allowance through the other taxable income and therefore avoid paying the 12% National Insurance.
In conclusion, for some small companies where the directors have no other taxable income (except dividends from their own limited company) it is beneficial to draw a monthly salary of £916 pm. For those directors who receive other taxable income in the tax year above £2,940 pa it is normally best to draw a salary of £672pa.
Personal advice
The above is generic advice to all small limited company directors.
Your circumstances can change each year and it is therefore important to review your other taxable income so that the best tax efficient salary can be planned each tax year. It may be worth a short meeting or discussion on your salary levels as the tax savings, or costs if you get it wrong, can amount to not insignificant amounts of tax.
Increase in tax efficient gross pay
H M Revenue & Customs are increasing the amount that can be taken tax free and without National Insurance from 6 April 2017. The amount will increase from £672 pm to £680. They however will increase the higher salary level of £916 to £958 i.e. £11,000 to £11,500 pa.
H M Revenue & Customs are increasing the tax free income tax personal allowance from £11,000 pa to £11,500 pa. Your tax code should therefore increase in-line with this change.
Benefits in kind and Forms P11D
Where an employer provides benefits in kind to an employee, the employer is required to complete a Form P11D and also pay Class 1A (employer’s only) National Insurance on that benefit in kind. The form must be filed with H M Revenue & Customs by 6 July 2017 and any class 1A paid by 19 July 2017. There are large penalties for late filing of Forms P11D.
As we approach the end of the tax year you should consider if you have provided any benefits in kind to any of your employees. If so, consider the requirement to prepare Forms P11D as soon as possible after 5 April 2017.
Information for readers
This email is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.