Tax efficient salaries for Tax year 2014-15
Tax efficient salaries for 2014-15 (i.e. the level at which no PAYE and NI is payable) would typically be set at the level of £663 per month, which is £7,956 per annum.
For the first time, for 2014-15 tax year the primary and secondary thresholds are aligned, so this means that both employees NI and employers NI start to become payable from the same level, of £7,956 per year.
However, the government have introduced a new Employer allowance (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 2014-15 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 2014-15
Based on the employer allowance being available, this means that a tax efficient salary of £10,000 per annum should be paid. This equates to £833.33 per month. At this salary level there would still be some employee’s NI due (about £246 per annum), but no employers’ NI as it falls within the £2,000 limit. It is not worthwhile to increase salary above £10,000 as above this amount income tax becomes payable.
General advice vs specific situations
It should be remembered that other employment income or pension income will mean that the personal allowance can be used up against other income, and so if you have more than just one source of your income, then please discuss with your usual MG Contractor Accountants contact to ensure that you are on the most tax efficient salary level.
Employer allowance from 6 April 2014
The government have introduced a measure (known as the Employer Allowance) which is effective for the new tax year about to commence from 6 April 2014. According to the Treasury this is set to assist 1.25 million businesses and charities, and around 450,000 businesses and charities won’t have to pay any NI contributions at all. 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 Contractor Accountants’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 2014
Further to the “roll out” of RTI in tax year 2013-14, HMRC are now becoming much more strict with effect from 6 April 2014 to ensure that payroll is operated in the manner required by RTI. This means that payslips 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 £10,000 will be paid during the year 2014-15. 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.
The next step is to consider the above factors and then liaise with your usual MG Contractor Accountants contact to ensure that your employment taxes are managed in the most efficient way during the tax year 2014-15.
MGCS specialises in providing accountancy services for contractors and temporary workers in a wide range of professions.
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