Where a person’s earnings fall between the lower earnings limit for Class 1 National Insurance purposes (£112 per week for 2015/16) and the primary earnings threshold (£155 per week for 2015/16) they are deemed to have paid National Insurance Contributions at a notional zero rate. Consideration should be given to paying a small salary which falls within this range.
The benefit of this is that it preserves their contribution record and entitlement to the state pension and certain contributory benefits, without actually costing them anything.
Therefore, where profits are extracted predominantly in the form of dividends, it is beneficial to also pay a small salary.
For 2015/16, a salary of between £5,824 and £8,060 per annum (£486 and £672 per month) can be paid without triggering a liability to either employee or employer Class 1 National Insurance contributions.
As a salary at this level is below the PAYE threshold, no PAYE tax needs to be paid. However, the employer must report pay details to HMRC under real time information.
Where the employment allowance is available, it may be beneficial to pay a higher salary.
Example:
Oliver is a director and 100% shareholder in his family company. In 2015/16 he pays himself a salary of £8,000 to maintain his contribution record and to preserve his entitlement to the state pension and contributory benefits.
He extracts further profits from the company in the form of dividends.
(Note – the taxation of dividends is reformed from 2016/17 which may affect his optimal profit extraction strategy.)
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