Synopsis: The new employer’s NIC allowance could change employing-the-spouse decisions.
Date posted: Friday, April 04, 2014
In our earlier bulletin we mentioned that the new Employment Allowance (EA) did not make any difference to the salary versus dividend debate: the existence of employee NICs saw to that. However, where the EA may be more useful is for very small businesses where, for example, a sole trader employs just one person – often their spouse.
For 2013/14 it makes little sense for the spouse to be paid more than the secondary threshold (£148 a week) because above this level employer’s NIC at 13.8% is payable, with employee’s NICs at 12% starting at £149 a week. Any minor gain in net income has to be considered against the hassle of paying (and deducting) NICs.
In 2014/15 the employee will still be liable for NICs once their earnings exceed the new higher primary threshold of £153 a week, but the employer’s NIC liability will be removed by the EA until their sole employee earns more than £431.70 a week.
For example, consider a higher rate taxpaying sole trader who employs their spouse with pay up to the level of the primary (employee) threshold. If the sole trader generates £1,000 extra profit, it will be worth £580 net to them after £400 income tax and £20 Class 4 NICs. On the other hand if the £1,000 is used to increase the spouse’s pay, the situation is as shown below (with 2013/14 for comparison):
|Nil Taxpayer Spouse||Basic Rate Taxpayer Spouse|
Such planning must always ensure that the spouse’s level of pay is justifiable. An increase from, say, £7,500 a year to £22,000 a year could well invite HMRC scrutiny. Where the employed spouse has little or no other income, an increase to make full use of their personal allowance is clearly much more attractive in 2014/15.
A similar same argument applies if the choice is between a dividend for a higher rate taxpaying employer or more pay for the employee. However, for a basic rate taxpaying employer the dividend route wins unless the employee is a non-taxpayer.
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