With the new tax year underway, it’s crucial to review your payroll in relation to directors who are paid monthly to ensure correct processing in April. This update is particularly important given the recent changes to national insurance contribution (NIC) thresholds.
Previous payment structure
Historically, directors receiving a monthly salary of £758.30 (equivalent to £9,100 per annum) have benefited from NIC credits towards their state pension without incurring any NIC liability. This arrangement allowed them to contribute to their pension without additional costs.
Changes in NIC thresholds
With the lowering of NIC thresholds, any payment made to contribute to NIC credits will now generate some NIC liability:
1.Lower earnings limit (LEL):
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- Annual salary: £6,500
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- Monthly salary: £541.60
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- Nic liability: £18.69 per month or £224.20 per annum
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- Benefit: contributes to NIC credit
2.Previous year’s values:
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- Annual salary: £9,100
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- Monthly salary: £758.30
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- Nic liability: £51.19 per month or £614.20 per annum
Employment allowance
For payrolls including other employees paid above the thresholds, the employment allowance will offset any NIC liability. This can be beneficial in managing overall costs.
Key considerations
When deciding on the salary to process from the start of the tax year for monthly-paid directors, the following should be considered:
- Age: older directors may not need to top up their state pension credit.
- Any salary over £5,000 will generate a liability.
Example scenarios
Sole director with no employees
- Annual salary: £5,000
- NIC liability: none
- State pension credit: not a qualifying year (below LEL of £6,500)
- Additional remuneration: director can take £45,270 in dividends, bringing total income to £50,270 (top of the basic rate band).
Sole director with no employees
- Annual salary: £6,500
- NIC liability: £225 per annum
- State pension credit: qualifying year
- Tax liabilities: no income tax or NIC for the employee
More than one director or employee
- Annual salary: £12,570
- NIC liability: none (covered by employment allowance)
- State pension credit: qualifying year
- Tax benefits: greater corporation tax relief for the company
Summary
It’s essential for payroll departments to carefully review and adjust the salaries of monthly-paid directors in light of the new NIC thresholds. By considering the various scenarios and their implications on NIC liabilities and state pension credits, you can ensure compliance and optimise any benefit available. Timely communication and informed decision-making will help avoid penalties and ensure that directors receive the appropriate pension credits.
For further information or advice, please get in touch with Julie Mason, director of payroll at PM+M using the button below.
