What is Employers National Insurance?
Each employee or Director can earn £11,000 each year before they have to pay tax, but your National Insurance payments start before this, beginning when your annual earnings reach £8,060. This is known as the secondary threshold.
After the £8,060 threshold is reached the amount of National Insurance payable is 12% by the employee / Director, and an additional 13.8% by the employer. The 13.8% paid by the employer is known as ‘Employers National Insurance’.
This means that once your salary is over £8,060, for every additional £100 you earn, you have to pay £12.00 in NI, and your company also has to pay £13.80, making a total of £25.80 in all.
- If a sole director draws a salary of £11,000, then 12% employee NI and 13.8% employers NI is paid on the amount between £8,060 and £11,000, at a tax percentage of 25.8%.
- If a sole director draws a salary of £8,060 and the remaining amount as dividends, then 0% employee NI and 0% employers NI is paid on the amount between £8,060 and £11,000, however 20% corporation tax is paid, plus 7.5% dividend tax, (on dividends taken over £5,000) totalling a tax percentage of 27.5%.
- It is therefore slightly more tax beneficial to take the higher salary of £11,000, rather than a lower salary and the rest as dividends. This saves around £100 in tax, simply by administering the funds differently.
Yes, if you are not great at remembering to pay your National Insurance contributions by the due date, then this carries a fine of £100, thereby wiping out your tax savings. So you may choose for simplicity, to simply take the secondary threshold salary and keep things simple.
In addition, if you have staff and claim the Employers Allowance, then it is far more beneficial to take the higher salary, as 13.8% of the National Insurance will no longer be payable, making the tax paid on the amount between £8,060 and £11,000 just 12%.
Why is it that I pay National Insurance in January, February and March, but not the rest of the year?
Most people are familiar with the way the PAYE system works, where your £11,000 annual allowance is spread evenly over the 12 months of the tax year (from April until the following March), which means you will pay roughly the same amount of tax each month.
For employees a similar system applies for National Insurance, with the £8,060 annual exempt amount spread over the 12 months. Unlike tax, however, each month counts entirely separately, so someone with no earnings in one month but high earnings the next will only have one month’s share of the threshold available as the “unused” amounts are lost and not carried forward.
For Directors the NI system works differently. An “annual basis” is used, and the amounts you earn are all added together (in a similar way to the PAYE system), but no NI is payable at all until the threshold of £8,060 is reached. Last year this meant that if you drew a salary equal to your personal tax allowance you didn’t reach the NI threshold until January, but in 2016/17 this will happen in a month earlier in December.
If you earn an annual salary of £11,000 then no NI will be payable for the first eight months of the tax year, but in December the NI threshold will be reached part way through the month. For January, February and March, 12% NI is due on all of your pay for the month.
How much should I expect to pay in those months?
If you are drawing a salary of £11,000 (£916.67 per month) then in December 2016 you will pay just under £23. For January, February and March 2017 this will increase to around £110 per month.
What’s the bottom line?
So, the bottom line is that although you will pay National Insurance in the last few months of the tax year, it is still the most effective way to draw funds from your company on a salary of £11,000 (if you take dividends over £5,000). If you take dividends of less than £5,000, then it is more beneficial to take a salary up to the secondary threshold of £8,060.