Posts by Mahesh Maiya

PAYE

Tax code changes

The emergency tax code for the 2023/24 tax year remains at 1257L, and there are no uplifts in tax codes.

The tables below show the bandwidths for the rest of the UK, Scotland and Wales.

Rest of UK Bandwidths & Rates

National Insurance

Earnings bands

NI Category A Rates

Statutory payments

The Statutory payments rates are changing from 6 April 2023.

Statutory sick pay

Employees on weekly earnings greater than or equal to the Lower Earnings Limit are entitled to a statutory weekly rate of £109.40 from 6 April 2023.

New statutory sick pay rates:

Parental pay and leave

The rates below come into effect from the first Sunday in April.

New Parental pay and leave rates:

Student loans

When you set up a student loan deduction for an employee, you must specify whether they’re on Plan 1, Plan 2 or Plan 4.

Employment allowance

For the 2023/24 tax year, Employment allowance is £5,000.

National minimum / living wage rates

The following rates are effective from 1 April 2023.

Apprenticeship Levy

The Apprenticeship Levy Allowance is set to £15,000.

The Apprenticeship Levy Rate is set to 0.5%.

You’d be surprised by how many people earning over £100,000 are not aware that they need to do a tax return. In fact, it catches loads of people out year on year because having to do a tax return for being a high earner is not widely publicised by HMRC. They’re not deliberately trying to catch you out, but they do assume that it’s common knowledge.

And if we can be sure of anything to do with tax, it’s that very little is common knowledge to anyone but accountants!

What changes when you earn over £100k?

Let’s first talk about the Personal Allowance. The Personal Allowance lets you earn the first portion of your income tax-free. In the 2021/22 tax year, this portion is the first £12,570 that you earn. People that earn less than £12,570 don’t pay Income Tax on their earnings.

When your income is higher than £100,000, your eligibility for the Personal Allowance reduces on a sliding scale. And this affects you if you’re employed, self-employed, employed and self-employed etc. Basically, no matter what tips your overall earnings over the £100,000 threshold, you’ll still be affected by this rule.

For every £2 that you earn over £100,000, you lose £1 of your Personal Allowance. This change in your taxable income is called your adjusted net income. When you reach £125,140, you lose your tax-free entitlement totally.

Why do I need to do a tax return?

HMRC need to check that your adjusted net income is correct. They estimate the tax you should be paying via your tax code. But if your tax code is wrong, you could be hit with a hefty tax bill each January.

What most people also don’t know is that ensuring that you’re on the right tax code is your responsibility, not HMRC’s 🤯

We therefore recommend that you check your tax code at the start of each tax year to make sure that you’re on the right one. Also if HMRC ever issue you with a new code, you should get in touch with them to make sure that it’s the correct one based on your circumstances. That allows you to get it sorted as early as possible, in case you do in fact owe money.

Things to be aware of

• Being taxed via a salary (PAYE) doesn’t guarantee that you’re on the right tax code
• The earlier you do your tax return, the sooner you know what you’ll owe (or be owed) on 31st January
• When you earn between £100,000 and £125,700, you pay 60% tax – here’s what you can do to avoid it
• If you owe less than £3,000 in tax, you can pay this via PAYE if you file by 30th December but be careful doing this if you were on the wrong tax code because it may cause more confusion
• Things that can tip your income over the £100,000 mark without you realising are:
  • Bonuses
  • Company shares vesting

Our advice?

Get your tax return sorted as early as possible after the new tax year begins so that you can get prepared to save, should you need to.

What’s the Most Tax Efficient Director’s Salary in 2022/23?

As a director you’re legally separate from your limited company, even if you’re also the owner. This means that you’re not allowed to simply keep the profits for yourself in the same way that a sole trader can.

Instead, you’ll need to decide how much to pay yourself. The most tax-efficient way to take an income from your own limited company is normally through a combination of a low salary (in the same way an any other employee) and dividend payments.

Why should I pay myself a director’s salary as well as dividends?

As a director, you’re technically an employee of your own limited company. Employers and employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends, so it makes sense to pay yourself a smaller salary and make up for it with dividend payments.

But the good thing about taking a salary is that is means you have regular income throughout the year which, because directors are ‘office holders’, can be below minimum wage without breaking any rules.

So how much should you pay yourself from your own company? Paying yourself as a company director is actually a bit of a balancing act in order to be as tax efficient as possible.

To get the balance right you’ll need to consider National Insurance contributions as an employee and employer, how many people there are in the business, tax allowances for dividends and for income, tax relief for employee salaries, and even the benefits of making qualifying payments for the State Pension.

Sit tight, and we’ll talk you through director’s salaries, and what the optimum amount to pay yourself is. We know it can be confusing, so get an instant quote online if you need more help!

National Insurance and director’s salaries

The thresholds for employer’s and employee’s NI are different, so this has an impact on the amount of salary that you take. If you take a salary from the business and it’s higher than the National Insurance threshold (the point at which you start paying National Insurance) for both employer and employee NI:

• Your company, as your employer, has to pay employer’s National Insurance Contributions.
• You, as the employee, pay National Insurance on the salary that your company pays you.

It basically means you’re paying National Insurance twice on the same money – which isn’t very tax efficient at all!

The 2022/23 NI thresholds for employers and employees are shown in our table below. The threshold for employers is actually lower, so they start paying NI sooner than employees.

If you need to refer to the figures for 2021/22, you can view them in our tax rates article.

2022/23 Employer and employee National Insurance thresholds

Qualifying for the State Pension

Taking a salary which is higher than the Lower Earnings Limit (£6,396 per year in 2022/23) allows directors to build up qualifying years for their State Pension.

If your salary is above the LEL but below the Primary Threshold (£9,880) then you’ll accrue all the benefits of NI, without actually paying it. This will affect how much State Pension you are entitled to once you pass state retirement age.

Using the tax-free Personal Allowance on your director’s salary

Your Personal Allowance is the amount you are allowed to earn before you have to start paying income tax.

In 2022/23, the Personal Allowance is £12,570.

You only pay tax on the part of your income that is above the Personal Allowance threshold. For instance, if you earn £14,000 in a year, you’ll only pay income tax on £1,430 of it.

£14,000 (salary) – £12,570 (tax free Personal Allowance) = £1,430. The amount subject to income tax is £1,430.

If you take a salary from your limited company which is below the Primary Threshold for National Insurance (£9,880) you won’t pay tax or NI on it.

Paying tax on dividends

It’s worth noting that although they’re not subject to NI, dividends are subject to tax, but at a different rate to normal income tax. The good news is that there is also a separate dividend tax allowance that you can use on top of the Personal Allowance.

In 2022/23, the Dividend Allowance is £2,000.

Salaries are an allowable expense for Corporation Tax

A limited company pays Corporation Tax on the profit that it makes throughout the year. Claiming tax relief on allowable expenses reduces the amount of profit, therefore reducing the amount of Corporation Tax which the company pays.

Salaries are an allowable expense, so if you’re a company director then paying yourself a salary from the business can help you lower your corporation tax bill.

How does the NI Employment Allowance affect director’s pay?

Thanks to the Employment Allowance, the optimum salary for a company director also depends on how many other people there are in the business.

In 2022/23 eligible employers can use the Employment Allowance to claim up to £5,000 in order to cover the costs of employer’s National Insurance.

To be eligible, employers must have at least 1 employee, or 2 directors, on the payroll, and the directors must not have another company that is claiming the Employment Allowance already. This means that sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.

2022/23 Director’s salaries – How much should I pay myself from my limited company?

Considering all the taxes and allowances together, the most tax-efficient salary for a limited company director depends on whether they’re a sole director, or there are more people in the business.

• The optimum salary for a sole director in 2022/23 is £9,100.
• The best salary if there are two or more directors is £11,908.

What is the best company salary for sole directors in 2022/23?

The most efficient salary for sole directors in 2022/23 is 

£758.33 per month.

If you’re the sole director and pay yourself a salary through your own limited company, the best amount to pay yourself is £9,100 per annum (or £758.33 a month). This is because:

• It’s at the secondary threshold so your company won’t need to pay employer’s NI on it.
• This salary is lower than the primary threshold, so you won’t need to pay employee’s NI.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is less than the tax-free Personal Allowance threshold.
• A sole director cannot claim the Employment Allowance.

What is the most tax efficient salary for two or more directors in 2022/23?

Having 2 or more directors on the company payroll means that you’re eligible to claim the Employment Allowance. In 2022/23 the primary threshold will increase mid-year.

This means that the point at which you start paying employee’s NI will be £9,880 until July 2022, when the threshold increases to £12,570. Over the year, the optimum salary in a company with two or more directors is £11,908

The most efficient salary for 2 or more directors in 2022/23 is 

£11,908.

This is because two or more directors can take an annual salary up to the primary threshold without needing to pay employee’s NI, and then claim the £5,000 Employment Allowance to cover the portion of employer’s NI they would otherwise incur.

What if I have another source of income?

The optimum amount for director’s payroll takes advantage of the Personal Allowance (£12,570), but if you are already using it up because you have other income from elsewhere, then director’s payroll becomes PAYE payroll, and subject to tax and NI as normal.

Now that we are approaching the end of the year, we are all starting to think about our taxes, and as the tax deadline is just a few months away, the sooner you get your self-assessment tax return file prepared, the better. This will also save you from a lot of worries. With that being said, are you planning to prepare everything all by yourself, or do you need the help of an accountant to get your job done? Well, it is always a better idea to hire an accountant who would do the job for you in a better and more professional way. So, let us have a look at some of those people for whom it is really important to hire an accountant for their tax return.

Whether it is a startup or an established organization, bookkeeping services are important for everyone. However, small businesses work on a very tight budget, and they also do not have sufficient resources available who would carry out all the bookkeeping and accounting services. So, it becomes very important for such companies to rely on bookkeeping and accounting services. The professional accounting service providers will get the entire job done for you, and you will also be able to have a better understanding over the cash flow of your organization.

When HMRC refuses to talk to a tax agent the problem is usually a missing client authorisation to act, but there are numerous and confusing ways to secure this.

 The most common way to authorise an agent to act is for a new client to complete a form 64-8, either online or on paper.

Smaller companies are finding share schemes offer a cost-effective way to show employees they are appreciated.

Cash bonuses or vouchers are the simplest and most common way for employers to express their appreciation for employees. Sometimes to remain attractive to employees, businesses will also provide additional benefits such as a company car, private medical cover or the use of a holiday home.

Here’s what you need to know about the changes to national insurance contributions announced by Rishi Sunak on 23 March.

Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022.

For 2022/23 the various secondary class 1 NIC thresholds are:

Employees’ class 1 NIC

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.25% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.

As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax.

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

New class 2 NI credit

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit.

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay.

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

Future alignment

Now that the starting thresholds for all flavours of NIC and income tax are to be aligned, perhaps this could be the first step toward aligning the rules for these two taxes.

The sticking points will be the pay periods for which NIC is calculated, compared to the annual nature of income tax. Also, Scottish income tax has completely different thresholds for its five rates compared to the two thresholds for income tax that apply in the rest of the UK.

Currently all companies, regardless of the size of their profits, pay corporation tax at the rate of 19%, which will continue until 31 March 2023.

From 1 April 2023, a new higher rate comes into effect for companies with profits over £50,000. They will face a significant increase and must pay corporation tax at a rate of 25%.

All companies with profits below £50,000 will continue paying the 19% rate of corporation tax.

Depending on the circumstances, if a company’s profits lie between £50,000 and £250,000, it may be possible to claim some marginal tax relief to reduce the 25% rate.

Key developments in the roadmap for MTD.

The Government has announced in a Written Ministerial Statement (WMS) that MTD for Income Tax Self Assessment (ITSA) will be introduced a year later, in the tax year beginning April 2024. This is in recognition of the challenges faced by many UK businesses and their representatives, as the country emerges from the pandemic over the last year and having listened to stakeholder feedback.