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What is the right salary? Can you still save on NI costs?
The answer will depend on the individual directors. There is no single correct answer, but there are several factors to consider.
If you are a shareholder director of a private Limited Company you have some influence over the remuneration policy of the Company.
In deciding that policy you will want to bear in mind the company's financial requirements, the rate of corporation tax on retained profits, and the personal tax and national insurance liabilities on the directors when they receive salary or dividend.
NMW -
Directors are subject to the National Minimum Wage (NMW) regulations. Every director should be paid at least the minimum wage of £3.70 for every hour worked.
Duties carried out as a director, if the director does not have a contract of employment, do not count as work for NMW as far as the Inland Revenue are concerned in monitoring the regulations. Employment Tribunals may take a different view in the event of a dispute with a director.
If an employee becomes a director, he will already have (at least an implied even if unwritten) contract of employment which will remain in existence unless expressly terminated.
Even if a director does no work, the company is required to keep a record of all employees working hours, and will be required to keep a record of the hours for the "non working" director.
The Inland Revenue are concerned at the loss to the Exchequer when profits are extracted by dividend in place of salary. The Inland Revenue is the enforcement agency for the NMW. The Inland Revenue have records of all directors and their remuneration. It will be easy for the Revenue to identify those directors whose remuneration is likely to be below the NMW and select the company for a PAYE investigation visit.
The maximum pay reference period is one month. All directors should probably therefore be paid each month. A large annual payment will not comply with the NMW.
Although there are exemptions for a sole trader or partners family members, a company cannot itself have a family so these do not apply to directors families.
Our payroll service can help if the administration of PAYE for directors is a problem.
NI -
It is still possible to reduce employee and employer National Insurance contributions, and, subject to the first budget of the millennium, that will continue into 2000/01.
One reason for the Chancellors attack on Personal Service Companies has been the unrealistic remuneration policies sometimes adopted.
An uncommercial arrangement will often attract the interest of the Inland Revenue. We are aware that paying a bonus in the form of 'platinum sponge' has avoided an NI charge. We have not recommended this arrangement to any of our clients. We do not believe that employees of our clients would welcome this commodity, unless the appropriate market was explained to them.
Employees generally expect to be paid in cash, by cheque, or by bank transfer, for the work that they do. We would expect most company owner/directors to take a basic living wage by that 'normal' method.
Some owner/directors have taken all their income by dividend. For some years this has avoided a NI contribution. For most the saving has been modest, and there has been the potential disadvantage of restricting pension provision.
Where the Capital Gains Tax Retirement Relief rules have not been an important consideration, we have recommended that owner/directors take some of their income in the form of rent if they own property occupied by the company. That income will continue not to incur a NI liability.
Where owner/directors have provided funds to their company by credit balances on loan account, income can be taken as interest. Tax at 20% must be deducted and accounted for at source but will be offset against the individuals liability and can be repaid in appropriate circumstances. This interest will continue not to incur a NI liability.
Dividends are set to become more attractive as a means of extracting income from an owner/director managed company from 6 April 2000.
In 1999/2000 a £10,000 (cost to company) bonus paid as salary is worth £6,863 or less to a basic rate taxpayer, £5,348 or less to a higher rate taxpayer, but a dividend paid by a small company would be worth £8,000 or £6,000 respectively.
In 2000/01 a £10,000 (cost to company) bonus paid as salary will be worth £6,952 or less to a basic rate taxpayer, £5,348 or less to a higher rate taxpayer, but a dividend paid by a small company paying corporation tax at the new rate of 10% would be worth £9,000 or £6,750 respectively.
Personal Service Companies (IR35) -
IR35 is the number of an Inland Revenue press release which affects the tax position where any services are provided through any intermediary under terms and conditions which would otherwise apply to an employment.
These regulations specify a deemed salary on which PAYE and NI are due, no matter what actual salary is taken, and have to be taken into account in appropriate cases.
We can discuss your individual circumstances with you.
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