Entitlement to the state pension and contributory benefits is contingent on having paid sufficient National Insurance contributions. Fortunately it is possible to achieve this for zero cost.
Persons with earnings between the lower earnings limit (£112 per week for 2015/16) and the primary earnings threshold (£155 per week for 2015/16) are treated as paying NICs at a zero rate. These notional contributions preserve entitlement to the state pension and contributory benefits.
For 2015/16 the salary should be set at between £112 per week and £155 per week in order to preserve state pension entitlement for zero NIC cost. This equates to an annual salary of between £5,824 and £8,060. As this is below the personal allowance, providing the person does not have a second job to which the personal allowance has been allocated, no PAYE tax should be due either. For 2015/16 the primary threshold is less than the secondary threshold (at £156 per week), so at this level no employer’s National Insurance is due, regardless of the age of the employee/director and regardless of whether the employment allowance is available. But see Tip 66 for the impact of the employment allowance on the optimal level of salary.
Under real time information (RTI), details of the amount paid to the employee must be reported to HMRC electronically. HMRC’s free Basic PAYE Tools software package can be used for this purpose.
Ian and Caroline are directors of their family company. To preserve entitlement to the state pension and contributory benefits they decide to pay themselves a salary of £7,200 (£600 per month).
As this is between the lower earnings limit (£112 per week for 2015/16) and the primary earnings threshold (£155 per week for 2015/16) they get the benefit of notional contributions but do not have to pay any actual employee or employer contributions.
However, under RTI they need to make a submission to HMRC each time that they make a payment. They can use HMRC’s free software package, Basic PAYE Tools, for this purpose.
Depending on whether the employment allowance is available, it may be beneficial to pay a higher salary of up to the personal allowance.