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For personal and family companies it can be beneficial to extract some profits in the form of a salary. Where the individual does not have the 35 qualifying years necessary to qualify for the full single-tier state pension, paying a salary which is equal to or above the lower earnings limit for National Insurance purposes will ensure that the year is a qualifying year.
New tax rates and allowances came into effect from 6 April 2019, applying for the 2019/20 tax year. These have an impact on the optimal salary calculation for family and personal companies. As in previous years, the optimal salary level will depend on whether or not the National Insurance employment allowance is available.
It should be remembered that directors have an annual earnings period for National Insurance purposes.
Employment allowance unavailable
Companies in which the sole employee is also a director are not able to benefit from the employment allowance. This means that most personal companies are not eligible for the allowance. Where the allowance is not available or has been utilised elsewhere, the optimal salary for 2019/20 is equal to the primary and secondary threshold set at £8,632 (equivalent to £719 per month and £166 per week).
At this level, assuming that the director’s personal allowance (set at £12,500) is available, there is no tax or employer’s or employee’s National Insurance to pay. However, as the salary is above the lower earnings limit of £6,136 (£512 per month, £118 per week), it will provide a qualifying year for state pension and contributory benefit purposes.
The salary is deductible in computing the company’s taxable profits for corporation tax purposes, saving corporation tax of 19%.
Employment allowance is available
It is beneficial to pay a salary equal to the personal allowance (assuming that this is not used elsewhere) where the employment allowance (set at £3,000 for 2019/20) is available to shelter the employer’s National Insurance that would otherwise arise to the extent that the salary exceeds £8,632.
Although employee’s National Insurance is payable to the extent that the salary exceeds the primary threshold of £8,632, this is more than offset by the
corporation tax deduction on the higher salary.
For 2019/20, a salary equal to the personal allowance of £12,500 exceeds the primary threshold by £3,868. Therefore, employee’s National Insurance of £464.16 (£3,868 @ 12%) is payable on a salary of £12,500. However, as salary payments are deductible for corporation tax purposes, the additional salary of £3,868 saves corporation tax of £734.92 (£3,868 @ 19%). This exceeds the employee’s National Insurance payable by £270.46.
So, if the employment allowance is available, paying a salary equal to the personal allowance of £12,500 allows more profits to be retained (to the tune of £270.46) than paying a salary equal to the primary threshold of £8,632.
If the director has a higher personal allowance, for example, where he or she receives the marriage allowance, the optimal salary is one equal to that higher personal allowance.
Director is under 21
Where the director is under the age of 21, the optimal salary is one equal to the personal allowance of £12,500 (assuming that this is not used elsewhere) regardless of whether the employment allowance is available. No employer National Insurance is payable on the earnings of employees or directors under the age of 21 until their earnings exceeds the upper secondary threshold for under 21's set at £50,000 for 2019/20. Employee contributions are, however, payable as normal
Any benefit in paying a salary above the personal allowance?
Once the personal allowance is reached it is not worthwhile paying a higher salary as further salary payments will be taxed and the combined tax and National Insurance hit will outweigh the corporation tax savings.
HM Revenue & Customs is sending out “Employer Compliance Check Questionnaires” without notifying agents, which could land businesses in trouble if the wrong information is provided.
The questionnaires are understood to be a replacement or substitute for a PAYE audit, which would typically require a visit from HMRC to ensure that a business’s payroll is compliant and being managed correctly.
The series of questions include:
What does the business do?
Where is the work carried out?
What are the names of Directors, how are they paid and what are their responsibilities?
Who prepares the payroll?
Which payroll package is used?
How many employees does the company have?
Are employees paid below the national minimum wage?
If so why?
How many workers are paid off-payroll?
The questionnaire is also understood to go into some detail about the expenses of the business including details of staff entertaining, work travel and loans to staff or directors.
Alongside the questionnaire, many employers are also asked to provide policies and documents, as well as key data about the business.
This new style of compliance checks should not be taken lightly and anyone who receives one should contact the person who manages their payroll to ensure the correct information is provided.
Failing to complete the questionnaire or providing incorrect information could lead to additional investigations or a financial penalty.
The Spring Statement contained information for businesses wondering when they will need to be ready for Making Tax Digital (MTD) for taxes other than VAT.
Until recently, the official line was that the rollout of the UK’s digital system would be confined to VAT until April 2020 at the earliest.
Now, a change to this wording seems to suggest that MTD will not apply to any further taxes until 2021.
April saw the launch of MTD for VAT, which requires VAT-registered businesses with a turnover of £85,000 or more to keep digital records and make quarterly digital returns using HM Revenue & Customs compatible software packages.
In practice, this means they may need to use a cloud accounting platform for record keeping and filing.
HM Revenue & Customs (HMRC) has published new guidance on the expansion of the IR35 requirements to contractors working in the private sector.
IR35 governs the tax status of people working through personal service companies (PSCs) and until now required public sector employers to determine whether contractors working for them should be taxed as employees.
From April 2020, the same rules will apply to bodies in the private sector and HMRC has published the following tips to help employers prepare for the change.
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
- Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
Currently, contractors working for private sector clients are themselves responsible for making sure they pay tax on the correct basis.
More than 300,000 workers have received a payslip for the first time under new rules that came into force in April.
However, experts fear that many employers may be unaware of the recent changes and how it could affect them.
The new rules require employers to include variable rates of pay and hours worked within their payroll reporting, which will enable workers to easily confirm that they are receiving the minimum wage.
Thought to primarily affect those employees on zero-hours contracts or who perform what has been described as ‘casual’ roles within a business, the Department for Business, Energy and Industrial Strategy (BEIS) have said that itemising and clearly identifying hours worked would ensure that staff could check that they are being paid at the correct rate.
The new rules will also help the Government to more easily identify where employers are failing to meet their national minimum wage (NMW) and national living wage (NLW) obligations, as well as their contributions to workplace pensions and holiday entitlement.
In recent years, the BEIS and HM Revenue & Customs have been taking a tougher approach to those who fail to meet payroll rules, often imposing penalties and naming and shaming the worst offenders.
All employees will also be given the ability to request a statement of rights on the first day of their employment, which sets out their annual leave pay and allowance.
Under the self-assessment system, a taxpayer is required to make payments on account – advance payments towards the eventual tax and National Insurance liability – where the previous year’s self-assessment bill was £1,000 or more, unless more than 80% of the tax liability is deducted at source, for example, under PAYE.
The self-assessment return for the 2017/18 tax year was due by 31 January 2019. It is the tax liability for 2017/18 which determines whether payments on account are due for 2018/19, and where they are, the amount of those payments.
Each payment on account is 50% of the previous year’s self-assessment tax and, for the self-employed, Class 4 National Insurance liability. Class 2 National Insurance, while payable under the self-assessment system, is not taken into account in working out the payments on account.
Where they are due, payments on account must be made by 31 January in the tax year and 31 July after the end of the tax year. Any final adjustment is made by 31 January after the tax year once the self-assessment return has been made, with any balance for the year being due by that date. Where the eventual liability is less than the payments made on account, the excess is refunded or set against the following year’s payments on account. However, HMRC may hold back the repayment where tax liabilities will fall due within the next 45 days until those liabilities have been paid.
Reduce your payments on account
If you know that your tax liability for the current year is going to be less than the previous year, you can apply to reduce your payments on account. This may be the case if you have suffered a downturn in trade or lost a major customer. If this is known at the time you file your self-assessment return, you can do this at the outset before you make the first payment on account. Alternatively, it can be done later in the year, for example once the accounting period has come to an end and the profit figure is known.
An application to reduce payments on account can be made online via the personal tax account.
Holly had a self-assessment tax and Class 4 National Insurance liability of £1,800 for 2017/18. Based on this, she is liable to make payments on account of £900 for 2018/19 by 31 January 2019 and 31 July 2019.
Holly prepares accounts to 31 March each year. She prepares her accounts to 31 March 2019 in April 2019, calculating that her tax and Class 4 National Insurance liability for 2018/19 is £1,400. As a result, she applies to reduce each payment on account to £700.
As she has already paid the first payment on account of £900, she claims a refund of £200. She makes the second (reduced) payment on account of £700 by 31 July 2019.
By 31 January 2020, she must pay her Class 2 National Insurance liability for 2018/19, together with the first payment on account of £700 for 2019/20 (being 50% of her 2018/19 liability). Beware of reducing the payments on account too much as interest will be charged on any shortfall between the payments made and 50% of the actual liability.