Are you claiming the new Employer’s Allowance?
One of the welcome changes confirmed in the 2014 Budget is the new Employer’s Allowance, which entitles most employers to reclaim up to £2,000 in Employer’s National Insurance. The aim of the allowance is to reduce the cost of employing people, and thus generate more jobs.
The new Employer’s Allowance cannot be claimed by everyone, the main exceptions being domestic servants (including nannies), some who work in the public sector and those who pay salary only via a deemed salary calculation. That’s not to say you cannot claim if you’re subject to IR35, it’s simply that you can only claim on the salary actually paid during the year and not the salary you’re “forced” to take via the deemed salary calculation at year end. The simple solution is therefore to take a salary of at least £22,400 during the year, thus creating an Employer’s National Insurance liability of just under £2,000 which you can then reclaim in full.
Another notable exception relates to companies that are under common control, so if you have two companies and control them both, or one owns the other, make sure you’re only claiming on one of them.
If you are entitled to the Employer’s Allowance, what is the best salary to take? The answer is of course never simple!
Many contractors will have a normal tax code of 1000L and will be able to earn up to £10,000 before any income tax becomes due. NI will kick in at £7,956 so you’ll have 12% Employees NI and 13.8% Employers NI – the new Allowance removes the 13.8% though, so you’d be left with a liability of just £245 in Employees NI. Add to this the fact that salary is deductible for Corporation Tax purposes too, so you’ll save 20% of the gross salary which equates to £2,000, and you’re left with an overall tax saving of £1,752.
But what if you have other income, like bank interest or rental profit? There may then effectively be tax payable on your salary after all, and the figures above could change quite dramatically. Other considerations include National Minimum Wage, which should be thought about if you want to pay statutory payments like Maternity Pay or Paternity Pay. If either of these apply to you then check with your contractor accountant and ask for a personalised example before you make a decision.
One final thought – this Allowance also adds yet another reason why a Limited Company is better than an Umbrella. As an employee of an Umbrella you won’t gain from this at all, but your Umbrella company will!
To find out more about the benefits of Limited Company contracting please give us a call.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.