In the recent Budget, the Chancellor announced significant changes to Employer's National Insurance Contributions (NIC) that affect many business owners, including sole directors who use payroll as a tax-saving strategy.
Specifically, the Employer’s NIC rate has increased from 13.8% to 15%, and the threshold at which Employer NIC is payable has reduced from £9,100 to £5,000.
These changes have important implications for small business owners who pay themselves a salary through payroll to take advantage of the corporation tax deduction on employment costs.
In this article, we'll explore the impact of these changes on a typical sole director’s payroll strategy, using a salary of £12,570 as an example, and compare the savings under the previous rules with those under the new rules.
The Strategy: How Running a Salary Reduces Corporation Tax
Sole directors often run a payroll to pay themselves a salary, typically setting it at a level that minimises NIC while taking advantage of the personal allowance for income tax. As salaries are an allowable business expense, this payment can reduce the company's corporation tax liability.
The corporation tax savings effectively offset some or all of the NIC incurred.
Let’s break down how this strategy worked before the budget changes.
Example Calculation Under Previous Rules
Director’s Salary: £12,570 per annum
Employer NIC Rate: 13.8%
Employer NIC Threshold: £9,100
Corporation Tax Rate: 19%*
*The corporation tax rate may be higher depending on your business profits.
Employer NIC Calculation (Old Rate)The Employer NIC payable would apply to the portion of the salary above the £9,100 threshold: NIC Payable = (12,570−9,100) × 13.8% = 3,470 × 0.138 = £479.86
Corporation Tax Saving CalculationSince the salary is an allowable expense, it reduces the company’s profit, thus reducing corporation tax liability: Corporation Tax Saving = 12,570 × 19% = £2,388.30
Net BenefitThe net benefit of running this payroll is the corporation tax saving minus the Employer NIC: Net Benefit = 2,388.30 − 479.86 = £1,908.44
So, under the previous rules, paying the director’s salary of £12,570 provided a net tax-saving benefit of £1,908.44.
New Rules: 2024 Budget Changes to Employer NIC
Let’s revisit the calculation now with the new rules, where the Employer NIC rate has increased to 15%, and the threshold has dropped to £5,000.
Example Calculation Under New Rules
Director’s Salary: £12,570 per annum
Employer NIC Rate: 15%
Employer NIC Threshold: £5,000
Corporation Tax Rate: 19%
*The corporation tax rate may be higher depending on your business profits.
Employer NIC Calculation (New Rate)With the lowered threshold, the Employer NIC payable applies to the portion of the salary above £5,000: NIC Payable = (12,570−5,000) × 15% = 7,570 × 0.15 = £1,135.50
Corporation Tax Saving CalculationThe corporation tax saving remains the same because the salary level has not changed: Corporation Tax Saving = 12,570 × 19% = £2,388.30
Net BenefitThe new net benefit, after the increase in NIC, would be:
Net Benefit =£ 2,388.30 − £1,135.50 = £1,252.80
Under the new rules, the net tax-saving benefit of running a salary of £12,570 has decreased to £1,252.80.
Summary: How the Savings Have Changed
Although there is still a tax saving to be made, the benefit has reduced significantly due to the increased Employer NIC rate and the reduced threshold.
Previously, the strategy offered a £1,908.44 net saving. Now, with the recent changes, the savings have dropped to £1,252.80 — a reduction of £655.64.
For sole directors relying on this payroll strategy as part of their tax planning, it’s essential to be aware of these shifts. While it’s still beneficial to run a salary to benefit from corporation tax deductions, the reduced savings should prompt directors to revisit their tax planning strategies.