If you receive remuneration from your company in the form of a relatively low salary supplemented with company dividends, you will need to know the new thresholds for tax and National Insurance Contributions (NIC) coming into effect from 6 April 2011, when considering the level at which to set your salary for 2011/12.
- Employers NIC at 13.8% will be charged on earnings above £7,072 per year (£589 per month)
- Employees NIC at 12% will be charged on earnings above £7,225 per year (£602 per month).
- The lower limit is £5,304 per year (£442 per month). Salary level must be above this in order to qualify the recipient for potential state benefits.
- If your salary for 2011/12 is £7,475 there will be no PAYE tax on it. However the company will need to pay £55.61 in annual Employers NI and the individual will suffer £30 in annual Employees NI.
- If your salary is £7,225 in 2011/12 there will be no PAYE tax or any Employees NI. The company will have an annual Employers NI liability of £21.11 on this level of salary.
- If your salary is £7,072 or less in 2011/12 then there will be no PAYE tax, no Employers NI and no Employees NI.
Although a salary of £7,475 will lead to a NIC cost for both the employee and the company, the employers NIC is tax deductible which means that, when looking overall at the company’s and the individual’s tax position in tandem, the £7,475 salary will save approximately £36 in overall tax compared to the £7,072 figure.
Therefore in summary, if you want to save approximately £36 in 2011/12 then pay £7,475 salary and account for the NIC to HMRC. Alternatively forget the £36, pay £7,072 salary and have no payments to make to HMRC – the choice is yours.
Also please bear in mind that, with effect from 6 April 2011, the 40% higher rate tax threshold will fall to £35,000 (from £37,400).
Therefore for an individual who is paid £7,475 in gross salary in 2011/12, the maximum amount of net dividend they can take out of their company before they will pay any personal income tax will be £31,500.
N.B. This assumes that they also have no other sources of taxable income in 2011/12.
Any dividends which exceed the 40% higher rate threshold will still be taxed at an effective income tax rate of 25%. If your income exceeds £150k, the effective income tax rate on dividends received is 36.1%.