tax efficient remuneration 2011-12

New rates of personal allowances and National Insurance rates come into effect in April 2011 This means that the tax efficient salary for many Directors of Small Limited Companies needs to be re-evaluated.

Employers National Insurance contributions at 12% start at £136 per week (£7,072 p.a.)

Employees National Insurance contributions at 13.8% start at £139 per week (£7,228 p.a.)

The personal allowance has increased to £7,475 p.a..

Option 1.
For people with other income (interest received / rental profits) of over £400 per year, the decision will be to pay themselves £136 per week (£589 per month). At this level no tax or National Insurance is payable. Employees are still credited with NI contributions stamp
Option 2.
For people without this extra income, it makes sense to pay £139 per week (£602 per month) – they’ll have to pay some Employers National Insurance at 13.8% on the extra £3 per week but thats all and they’ll receive Corporation Tax Relief on the salary at 20%. A net saving of 6.2%. This saving equates to about £10 per annum but will require a payment of National Insurance (one payment in April 2012 of £20.98) to HMRC. The extra administration of this may make some directors prefer option 1.
As a practice, everyone currently earning £476.25 (the tax efficient salary for 2010-11) will be increased to £589 or £602 per month from April 2011, we’ll be sending out letters to all relevant clients to advise of this.
For tax credits claimants, the position may be different and we’ll advise on this as a separate matter.
For small business tax advice call Chris Root on 0161 621 9973

National Minimum wage 2011-12

Rates from 1 October 2011
The NMW rates are reviewed each year by the Low Pay Commission and from 1 October 2011:
the main rate for workers aged 21 and over will increase to £6.08
the 18-20 rate will increase to £4.98
the 16-17 rate for workers above school leaving age but under 18 will increase to £3.68
the apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship will increase to £2.60

How does a Limited Company work - 2011-12

Anyone over 16 years of age can set up a Limited Company. There are three main reasons for setting up a Limited Company
1. Image – some people think a business looks more professional and established if it has ‘Limited’ at the end of its name.
2. Limited Liability – if the business becomes insolvent and goes into liquidation – the assets (eg. Personal house, car) of the owners of the business are protected, only the assets belonging to the business will be lost.
3. Tax savings – profits of a limited company are taxed at 20% compared to 29% for a sole trader or partnership. You form a Company at Companies House. This can be done by an accountant (we charge £70.00 + VAT for this service).
You need several things to set up a Company
1. A unique name (eg XYZ limited)
2. A registered office address (your place of business/ home)
3. At least one Director (probably yourself) – this person runs the Company
4. At least one shareholder (probably yourself) – this person owns the Company
When the Company is set up, a bank account can be opened for the Company and the Company can start to trade. Invoices should have the name of the Company on then and the money generated should be put in the Limited Company bank account.
Every year, the Company has to prepare accounts showing how much profit it made (Profit & Loss account) and the solvency of the business (Balance Sheet)
The Company pays tax on its profits at 20%. This is payable 9 months after the year end date.
The director takes a salary from the business. This is an allowable expense within the business and reduces the profits of the business. In 2011-12 the most tax efficient annual salary was £7,225 as no Employees National Insurance is payable at this level.
The shareholder is allowed to take dividends from the Company. These are taken from the after tax profits of the Company and unless the shareholder is a higher rate taxpayer then there is no tax liability on the dividends.
An example of the accounts of a business is
Year ended 31 March 2012
£
Sales 62,225
Expenses -10,000
Profit 52,225
Salary -7,225
Taxable Profit 45,000
Tax @ 20% -9,000
Profit after tax 36,000
Dividends -31,000
Retained Profit 5,000
Here, the only tax payable is the £9,000.00. Assuming that the Director and Shareholder are the same person and he/she has no other income. There is no tax or NI payable on the Salary as the director earned less than the National Insurance threshold and no tax payable on the dividends as total income is less than the Higher Rate tax band.
If a sole trader had earned this much, then the tax calculation would be
Tax on Profit of £52,225
£7,475 @ Nil
£35,000 @ 20% = £7,000
£9750 @ 40% = £3,900
NI on profit of £52,225
£7,225 @ nil
£35,250 @ 9% = 3,172.50
£9,750 @ 2% = £195.00
Class 2 NI £130.00
Total tax and National Insurance bill £14,397.50
The tax saving is therefore £5,397.50 (£14,397.50 – £9,000.00).
Disclaimer
Seek professional advice before putting this into practice. We will not be held responsible for this advice as there are many variables that may change how this works in practice. You can contact us on 0161 621 9973 for advice.