As previously announced by the government, increased NIC started to apply on 6 April 2022. Tax-efficient profit extraction
The rate of employer’s NIC above the ‘secondary threshold’ (currently £9,100 per annum) is now 15.05%, up by 1.25% from the previous 13.8%.
Below the secondary threshold, the rate remains 0%.
For employees, those earnings falling between the ‘primary threshold’ (currently the equivalent of £9,880 per annum on a pro rata basis but see below re ‘in year’ change) and the ‘upper earnings limit’ (currently £50,270) is now 13.25%, again up by 1.25% from the previous rate of 12%.
Below the primary threshold, the rate remains 0%.
The other key threshold to bear in mind is the ‘lower earnings limit’. This is currently set at £6,396 per annum.
Above this level, an employee will receive a ‘credit’ for certain state benefits such as the basic state pension, without actually incurring NIC cost.
‘In year’ change to the Primary Threshold
In the Spring Statement of 23 March, the Chancellor announced a measure to try and ease the pain of these punitive rises for those on moderate incomes by increasing the current primary threshold from £9,880 per annum to £12,570 from 6 July 2022.
This ‘in year’ change to the thresholds brings with it some complications when owner-managers are trying to work out the most tax efficient way of extracting profits from their company.
Optimal remuneration strategy for the current tax year ending 5 April 2023
So are there any hard and fast rules we can draw up when deciding the most tax-efficient mix of salary and dividends in the current tax year?
Employment allowance available
Most small employers will be able to claim the employment allowance which covers up to £5,000 of employer’s class 1 NIC.
Note this cannot be claimed by companies where the only employee is the director.
If this is available to set against employer’s class 1 NIC on director-shareholders’ salaries, then the most tax efficient means of extracting profits is likely to be a salary equal to the personal allowance of £12,570 with the balance of profits being extracted by dividend.
Employment allowance not available
In this case, the most tax-efficient salary level is likely to be £11,908 for the current 2021-22 tax year.
This is the ‘blended’ equivalent of the current primary threshold of £9,880 p.a. up to 5 July and then £12,570 from 6 July.
At this level, there will be no employee’s class 1 NIC to pay and the small amount of employer’s class 1 NIC, which will be £423, is more than set off by the overall corporation tax saving (because salary costs are a deductible expense against company profits for corporation tax purposes) when compared to lower remuneration levels.
As the salary increases above £11,908, the effect of the punitive employee’s and employer’s NIC hit and the absence of the availability of the employment allowance to mitigate this means dividends are generally the best way to extract profits.
How can we help?
The above are rules of thumb and like most areas of tax, there is no substitute for specific advice taking into account all of your circumstances.
Some of the factors which can affect the profit extraction strategies outlined above are:
- If the personal allowance is not available, for instance if overall taxable income for the individual is over £100,000, the salary-dividend mix is likely to be different.
- If the director-shareholder has a contract of employment, the national minimum wage legislation will apply which is likely to rule out the above low salary levels. The contract would need to be terminated before undertaking this planning.
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