Take advantage of the £2,000 employment allowance from 6.4.14

News: March 2014

Take advantage of the £2,000 employment allowance from 6.4.14

The new £2,000 “employment allowance” that provides relief from paying employers NIC on the first £2,000 of contributions starts 6 April 2014. For many employers the benefit of the £2,000 relief will be obtained in month 1 by reducing employers NIC payable, for others it could take several months before credit for the £2,000 is obtained on a cumulative basis.

This new relief appears to be available to most employers, including one man band companies, and leads us to consider a change of profit extraction strategy from 6 April 2014 as it will be more advantageous to increase directors’ salaries to £10,000 instead of the NIC threshold of £7,956.

The extra £2,044 will save £409 (20%) corporation tax (£818 for two directors) whereas the additional employees NIC would be just £245 each.

Husband and wife company – from 2014/15:

Salary £9,755 net = gross £10,000
Dividend up to BR band £28,678 net = gross £31,865
Top of BR band £41,865
Net cash extracted (each) £38,433
Total extracted £76,866

There would however be 20% corporation tax payable.
Profits before tax £71,695 @ 20% = £14,339 corporation tax, thus profits before salaries and tax would be £91,695.

This results in an overall tax and NIC rate of just 16.2%.

A salary in excess of £10,000 would attract income tax (at 20%) and employee’s NIC at 12.2%.

Please note:
  1. You will not get the full £2,000 allowance unless the salary is at least £22,449.
  2. This Employment allowance is not available for all “one man band “ companies.
  3. Complex rules apply to those companies inside IR 35 as the salary is a deemed salary.
  4. Companies who are associated will need special advice as restrictions apply.
  5. Certain Employers whose activities are wholly or mainly within the NHS may not be eligible for the employment allowance.

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