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Employers are able to claim an employment allowance which reduces the amount of secondary employer’s NIC that they pay. For 2015/16 the allowance is set at £2,000 and is available to most employers, including one-man companies. However, it should be noted that while the allowance is to be increased to £3,000 for 2016/17, it will no longer be available to companies where the director is the sole employee.

In a company where the allowance would otherwise be wasted it is possible to make further savings by paying a slightly higher salary to utilise some of the employment allowance.

The additional salary is deductible for corporation tax purposes, saving corporation tax at 20%. Paying a salary above the primary NIC threshold will mean that the employee will suffer Class 1 NICs on the excess at 12%, but this is offset by the corporation tax saving (at 20%) on the additional salary. No income tax is payable on the additional salary until the personal allowance (£10,600 for 2015/16) is reached. Where the director does not have other income to mop up the remainder of the personal allowance, this will be beneficial.

Note – the strategy of paying a salary equal to the personal allowance can be used for one-man companies for 2015/16 as they can benefit from the employment allowance. However, from 2016/17 the employment allowance will not be available to companies where the director is the sole employee (although it may be possible to retain entitlement to the allowance by employing a family member in addition to the director).

Example:
Sophie is the director of her own personal company. For 2015/16 she pays a salary of £10,600. In the absence of the NIC Employment Allowance she would pay employer NIC of £343.34 ((£10,600 - £8,112) @ 13.8%).

However, as this is less than the NIC employment allowance of £2,000, no actual employer’s NIC is payable. She will also pay employee’s NIC of £304.80 on the part of the salary in excess of the primary threshold (£8,060 for 2015/16) at the rate of 12%. No income tax is payable as her salary is covered by her personal allowance.

Salary payments are deductible for corporation tax purposes. Paying a salary of £10,600 rather than of £8,060 will generate an additional corporation tax deduction of £508 (£2,540 @ 20%). This outweighs the employee NIC of £304.80 payable on the a higher salary meaning that overall Sophie is £203.20 better off by paying herself a salary of £10,600 rather than one of £8,060.

If she pays a salary in excess of the personal allowance, the additional income tax payable, combined with employee NIC, will outweigh any corporation tax deduction. The optimal salary is one equal to the personal allowance of £10,600 for 2015/16.