Family inv co

Use of a Family Investment Company

Family Investment Companies (FIC) offer a tax efficient way to retain control over assets and still pass them on to the next generation. By providing a degree of flexibility they can be ‘fine-tuned’ to a family’s particular circumstances or requirements e.g. by drafting the company’s articles in such a way as to prevent the transfer of shares outside of the family. 

For many people a trust is the most flexible way to achieve the same goal as the lifetime IHT threshold of £325,000 per individual is sufficient to mitigate potential tax liabilities, however, assets worth more transferred to a trust would be subject to an immediate IHT charge. A FIC enables a transfer of value above the IHT threshold without suffering a tax charge whilst still retaining control of assets. The main downside of a FIC is that the shares have to belong to someone whereas a trust can have beneficiaries that are still to be born (although shares can be held by a trust to benefit future grandchildren for example).

The method of setting up a FIC is the same as when incorporating any other company limited by shares, the difference being in the designation of those shares. For example, a donor (e.g. parent) would own one ‘A’ share with the right to appoint one director and the right to vote at general meetings but with no entitlement to dividends or any return of capital and the children would own one ‘B’ share each. These ‘B’ shares would have no voting or other ‘control’ rights but would have full entitlement to any dividends or return on capital (which must be approved by the parents). The ‘B’ shares could be created with differing rights including tax efficient withdrawal of capital, enjoyment of growth in capital value or a right to future dividends. 

At the same time, the children/beneficiaries enter into a shareholders’ agreement, which is a private document setting out the directors’ powers and shareholders’ rights. This agreement together with the company’s Articles of Association are key to providing that control rests with the board of directors, usually comprising the donor and spouse or other trusted individuals. As with any other company limited by shares the board will have the power to appoint additional directors and make decisions including how cash held is invested, the distribution of profits, transfers of shares, changes to voting and share of income and capital. Importantly, the donor has these powers as a director without needing to hold voting shares which would otherwise give the shareholder value in the company potentially chargeable to IHT.

Funding for the FIC is typically in the form of cash (which can be funded via an interest-free loan); the company then acquires assets (property, cars, art, trading companies etc.) that generate a return. Income is either re-invested within the company, or used to repay the loan (alternatively the loan could be gifted/assigned to other family members where the capital value is no longer needed or into a trust). The funding need not be in cash but could be a property, for example, but there would be potential Stamp Duty Land Tax and Capital Gains Tax implications.

Any underlying capital value grows in the name of the beneficiaries. The ongoing tax position is the same as for any other company limited by shares with a corporation tax liability on any income or capital gains.

Tax allowances 20.04

Tax allowances frozen until April 2026

The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22 levels until April 2026.

Personal allowance

The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the 2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and 2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their income rises above £12,570.

Income tax rates and bands

The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This remains the case for tax years up to and including 2025/26.

The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of 45% on taxable income in excess of £150,000.

Capital gains tax annual exempt amount

The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April 2026.

However, there may be changes to capital gains tax on the horizon as this is something that the Government are looking at.

National Insurance

The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for 2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain unchanged until April 2026.

All other National Insurance thresholds will be reviewed at the appropriate time.

Inheritance tax

The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax. 

The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or above by £1 for every £2 by which the value of the estate exceeds £2 million.

Pension lifetime allowance

The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at £1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following four tax years.

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Super-deduction for capital expenditure

To encourage companies to invest, enhanced capital allowances are available for expenditure incurred within a limited two-year window. As an alternative to the annual investment allowance (AIA), companies will be able to benefit from either a super-deduction or a new first-year allowance, depending on whether the expenditure is on assets that would qualify for main rate capital allowance or for special rate capital allowances.

Super-deduction

The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must meet additional conditions in order to qualify for the super-deduction.

Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on or after this date.

The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an effective rate of relief of 24.7% (130% x 19%).

Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.

Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.

A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.

New first-year allowance

A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1 April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.

This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year allowance may be beneficial where the AIA limit has already been reached.

Co car 20.04

Running a car on the company

Despite successive Governments changing the rules to increase the tax take, the provision of company cars remains one of the more popular benefits an employer can give to an employee. 

Benefit in kind

A director or employee who earns more than £8,500 is charged an amount as a benefit in kind (BIK) if the car is used by an employee but owned by the employer. The calculation is a percentage of the car’s list price appropriate to the level of the car’s CO2 emissions, i.e. the higher the CO2, the higher the tax. An additional rate is charged in respect of car fuel provided for private use. With fully electric vehicles increasingly becoming the ‘norm’ 2020/21 saw the BIK charge reduce to 0% before rising to 1% in 2021/22 and then 2% through to April 2025. This massive reduction in percentage makes arguments for a company car alternative seem outdated. However, there is still a place for alternatives.

A company car allowance is a cash allowance added to the employees’ salary allowing them to purchase or lease a vehicle privately. It offers the employee the perks of having a new vehicle without the employer having the hassle of running a car fleet. As the payment made is part of the salary, it is charged to tax at the usual income tax and NIC rates under PAYE.

There are no set rules as to the amount that the employer can pay as a company car allowance but it is generally assumed that the cash offered will be approximately the same amount as the employer would have paid to lease the company car. 

Employees paid an allowance

Where an employee is paid an allowance for using a personally owned car on business, this is tax-free up to a certain point. Currently, if the payment made is 55p for example, for each business mile 45p of this can be claimed and paid tax-free; the balance of 10p being taxable. How the payment is made will determine whether an exemption is allowed for NI purposes. To avoid the NIC charge car allowances need to be paid in proportion to the amount of business travel and then the 45p per mile exemption can be claimed. 

If directors or employees are paid a fixed allowance towards their car’s running costs, then the amount needs to be on a sliding scale linked to the expected business mileage (e.g. those who expect to travel up to 4,000 miles per year receive one set rate, up to 8,000 miles a different amount and above that another etc.) This way, initially NIC will be payable on the allowance and then, the NI-free element of the allowance can be calculated when the exact business mileage is known; any amount overpaid can be refunded.

Using your own car

Many employees use their own car for business purposes and pay for the fuel used via a company fuel card. For a car fuel tax charge to arise, the employee must first be chargeable to tax in respect of the car, which means it must be a company car and used by either a director or an employee. There will be a BIK charge on the cost of the private fuel obtained by using the company card unless the employee reimburses for the private fuel used. 

To ensure that the rules are adhered to, the company should have a written policy in place as confirmation. In addition, procedures should be put in place to keep accurate mileage records and a monthly amount for private mileage can then be deducted from net salary. 

SDLT Threshold

Temporary increase in SDLT threshold

Stamp Duty Land Tax (SDLT) is payable where property is acquired in England and Northern Ireland. Land and Building Transaction Tax (LBTT) is payable in Scotland and Land Transaction Tax (LTT) is payable in Wales,

SDLT is payable where the chargeable consideration exceeds the relevant threshold at the rates applicable to each slice of the consideration. A supplement of 3% applies to second and subsequent residential properties where the consideration is more than £40,000. The supplement does not apply where the main residence is exchanged.

Temporary increase in residential threshold

The SDLT residential threshold was temporarily increased to £500,000 from 8 July 2020 to 31 March 2021. The thresholds applying for LBTT and LTT were also increased for a temporary period, but these are not considered here.

Property investors and those buying second homes also benefitted from the increase as the 3% supplement is applied to the rates, as reduced.

Extension 

The residential threshold will remain at £500,000 beyond 31 March 2021 and will stay at this level until 30 June 2021. From 1 July 2021 until 30 September 2021 it will reduce to £250,000 returning to its normal level of £125,000 from 1 October 2021.

The first time buyer threshold will return to £300,000 for properties up to £500,000 from 1 July 2021.

Rates

The rates of SDLT depending on the completion date are shown below.

8 July 2020 to 30 June 2021

Property valueMain homeAdditional properties
Up to £500,000Zero3%
Next £425,000 (£500,001 to £925,000)5%8%
Next £575,000 (£925,001 to £1.5 million)10%13%
The remaining amount (over £1.5 million)12%15%

1 July 2021 to 30 September 2021

Property valueMain homeAdditional properties
Up to £250,000Zero3%
Next £675,000 (£250,001 to £925,000)5%8%
Next £575,000 (£925,001 to £1.5 million)10%13%
The remaining amount (over £1.5 million)12%15%

From 1 October 2021

Property valueMain homeAdditional properties
Up to £125,000Zero3%
The next £125,000 (£125,001 to £250,000)2%5%
Next £675,000 (£500,001 to £925,000)5%8%
Next £575,000 (£925,001 to £1.5 million)10%13%
The remaining amount (over £1.5 million)12%15%

Window of opportunityThe extension to the period for which the £500,000 threshold is in place provides an opportunity for investors to save money if they can complete by 30 June 2021. If this is not possible, there are still savings on offer where completion takes place by 30 September 2021

D Partnership

Dissolving a partnership 

Dissolving a partnership 

A partnership can be either an ordinary partnership or a limited liability partnership (LLP); both forms comprise more than two people setting up in business sharing the risks, costs and responsibilities, as well as the profits. One consequence of being a member is that each is liable for the partnership’s debts and obligations. There is no limit of liability for an ordinary partnership meaning that a claimant can sue either one or all of the partners for the full amount of their claim. LLPs have similar flexibility and tax status to ordinary partnerships. With the benefits of limited liability each partner is liable only for the amount of capital they invest.

Informal partnerships

The vast majority of partnerships are set up informally without a written partnership agreement and if this is the case, then dissolution is covered by the Partnership Act 1890. With just two members the partnership will dissolve automatically should one member die, is made bankrupt or resigns. Partnerships can also be forcibly dissolved when an event occurs that makes it unlawful for the business to continue or for partners to carry on as a partnership e.g., if an accountant has their practising certificate withdrawn. In this case the partnership will be dissolved, and a new one can be formed of the remaining members. If the partnership comprises two members or more then it can continue. In comparison, unlike ordinary partnerships, LLPs do not have to be dissolved on the resignation, death or bankruptcy of a member. Instead, the Limited Liability Partnerships Act 2000 applies a modified form of the law relating to companies’ insolvency and winding up.

Individual partners

Individual partners are taxed as sole traders but with their income being a share of the profits declared on the partnership tax return. If the partnership ceases, then the same cessation rules apply as if the partner was a sole trader such that if the final period of trading produces a loss for the partner leaving then that loss can be carried back for three years preceding the beginning of the accounting period in which the loss was incurred, provided part of that accounting period falls within the 12 months prior to cessation. 

Should the partnership dispose of assets held on dissolution (e.g. a property or properties), the partner is deemed to be disposing of his proportionate share of those properties. If a partner takes over ownership of an asset on dissolution, then the partner receiving the asset is not regarded as disposing of his share. A computation will first be necessary of the gains which would be chargeable on the individual partners as if the asset had been disposed of at its current market value. Where the calculation results in a gain being attributed to the partner receiving the asset, then that gain is ‘rolled over’ (deferred) by reducing their cost by the amount of the gain. In this way the cost carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed. 

Capital allowances

On cessation, assets qualify for capital allowances that are not actually sold but taken over by one or more of the partners. These assets are deemed to be disposed of and immediately re-acquired at market value (unless the assets are actually disposed. Balancing allowances may be claimed if the market value is less than the written-down value. A balancing charge will be made if the market value is greater than the written-down.

CIS Compliance

CIS compliance for property developers 

The Construction Industry Scheme (CIS) is a scheme whereby contractors of building firms are required to deduct tax at source from payments made to sub-contractors working for them. Some sub-contractors are entitled to be paid without any tax deduction, others at 30% as per HMRC’s instructions but the majority have 20% tax withheld before payment. The scheme requires registration as a contractor and administration in the form of monthly submissions; the penalties for non and/or late submission can be severe. 

Definitions

The definition of ‘contractor’ is widely drawn – HMRC’s Construction Industry Scheme guide CIS 340 defines a (mainstream) contractor as ‘a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be … many other businesses.‘ 

The definition of ‘construction work’ is again widely drawn to include the construction, alteration, repair, extension, demolition or dismantling of buildings and/or work – although there are exceptions. A business set up to undertake such construction work is obviously required to operate the scheme as would a property developer undertaking a trading business in construction of properties being developed for sale (even if just on one property). Private householders paying for work on their own homes will never fall within the CIS regime’s scope. 

Buying property as an investment

In comparison, someone who buys and rents out property typically does so as an investment; this would appear to be confirmed as under section 12080 of The Construction Industry Scheme Reform Manual it states that:

A ‘property investment business’ is not the same thing as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental. “

However, a problem arises when an investor landlord buys a property, doing it up intending to keep it as a rental property – is that person now a developer and therefore caught under the CIS rules? HMRC confirm that this is the case as further on in the CIS manual it states that:

Where a business that is ordinarily a property investor, undertakes activities attributed to those of ‘property development’, they will be considered a mainstream contractor [caught for CIS] during the period of that development”.  

Therefore, the investor now becomes a developer liable to register as a contractor under the CIS regime even if just one property is renovated.

Wider scope for the CIS scheme

The system goes further because even where the landlord is predominantly a property investor and therefore not a construction business (e.g. a restaurant chain), they are deemed to be a contractor and subject to the CIS regime if they spend more than £1 million a year, on average, for three years on ‘construction operations’ (e.g. repairs, construction of extensions etc), on their premises or investment properties. There is a slight ‘let out’ in that such businesses can ignore expenditure on property such as offices or warehouses used by the business itself.

Some businesses commission construction firms to undertake work for them but if the work is for the business’s own premises, used for that business, then the business itself is not obliged to register or act as a CIS contractor.

‘De minimus’ limit

There is a ‘de minimus’ limit in that on application, HMRC can authorise deemed contractors not to apply the scheme to small contracts for construction operations amounting to less than £1,000, excluding the cost of materials however this arrangement does not apply to mainstream contractors.

Government support

Further grants for the self-employed

The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021. 

Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.

Fourth grant

The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.

To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.

To qualify for the grant, the trader must either:

  • be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
  • have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.

The trader must also declare that:

  • they intend to continue trading; and
  • they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.

Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.

Fifth grant

The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.

Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.

Newly self-employed

When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions. 

Grants are taxable

Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.

Tax relief

The enhanced carry back of losses

Many businesses have suffered losses as a result of the Covid-19 pandemic, and where a business has made a loss, various options are available to obtain relief for that loss. The challenge is to make the best use of the loss.

To help loss-making businesses, legislation is to be introduced to increase temporarily the period for which a business can carry back a loss from one year to three years. The extended carry back is available to both unincorporated business and companies, and can be used to generate a useful tax repayment at a time when cash flow is tight.

Unincorporated businesses

Under the existing rules, a person who incurs a trading loss in a tax year can make a claim to offset the loss of their net income of the current year, the previous year or both years. This option is now available to traders using the cash basis.

For a limited period, the carry-back period will be extended, and losses can be carried back and set against trading profits of the previous three years. from one. Losses carried back must be set against the income of a later year before an earlier year. The extended carry back will apply to losses in 2020/21 and 2021/22. It will enable a loss for 2021/22 to be carried back where a loss was also made in 2020/21 and the individual had no other income for that year.

Example

Lottie is a beautician. She prepares accounts to 31 March each year. For the year to 31 March 2021, she made a loss of £12,000. It is assumed that she will make a loss of £7,000 for the year to 31 March 2022.

She had trading profits of £27,000 in 2019/20, £20,000 in 2018/19 and £16,000 is 2017/18.

She carries the loss of £12,000 back to 2019/20 reducing her profits to £15,000 for that year and generating a tax repayment of £2,400 (£12,000 @ 20%).

In the absence of the extended carry back, if she had no other income (or gains) for 2021/22 and no income for 2020/21, Lottie would have to carry the loss from 2021/22 forward to set against other profits from the same trade. However, the extended carry-back allows her to carry the loss back to set against trading profits of 2019/20. Although, this will reduce her profits to £10,000, which is below the personal allowance for that year of £12,500, it will generate a tax repayment of £500 (£2,500 @ 20%), which may be useful. 

As the loss cannot be tailored to preserve the personal allowance, if she does not want to waste any of her personal allowance for 2019/20, she can instead carry the 2021/22 loss forward.

Companies

The extended back also applies for corporation tax purposes for losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and losses incurred in accounting periods ending between 1 April 2021 and 31 March 2022.

For corporation tax purposes, losses can be carried back to the preceding accounting period. Where the extended carry-back applies, a loss can be carried back and set against profits of the same trade for the preceding year and two previous years, with losses being set against a later year before an earlier year.

Example

ABC Ltd makes a loss of £40,000 for the year to 31 January 2021 and a loss of £25,000 for the year to 31 January 2022. The company made a profit of £30,000 for the year to 31 January 2020, a profit of £50,000 for the year to 31 January 2019 and a profit of £42,000 for the year to 31 January 2018.

The loss for the year to 31 January 2021 is carried back and set against the profit of £30,000 for the year to 31 January 2020, with the remaining £10,000 set against the profit of £50,000 for the year to 31 January 2019, reducing it to £40,000. This generates a corporation tax repayment of £7,600 (£40,000 @ 19%).

The loss of £25,000 for the year to 31 January 2022 is carried back and set against the remaining profits for the year to 31 January 2019, reducing them to £15,000. This generates a tax repayment of £5,000 (£25,000 @20%).

Without the extended carry back, it would only have been possible to carry-back £30,000 of the loss for the year to 31 January 2021, reducing the repayment to £5,700. Using the extended carry back increases the total repayment by £6,900.

Optimal salary

Personal and family companies – Optimal salary for 2021/22

A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.

Preserving pension entitlement

One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years. 

For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.

Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.

Optimal salary – Employment allowance is not available

The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.

For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month). 

Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 – £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.

Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.

Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).

Optimal salary – Employment allowance is available

In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%.

Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).