Ours is a small two directors company. Directors are only employees of the company and they are paid £600.00 each every month and company does not incur any class 1 NIC liability. We use Moneysoft Payroll Manger and my question is whether it is a good idea to claim HMRC £2000.00 employment allowance? I will be creating next tax year 2014-15 files in next few days. While creating next years file Moneysoft gives you following options relating to Employment allowance: 1)Yes, this employer qualifies for the NIC allowance. (If you pick this option you will be required to file an additional EPS) 2) NO, this employer does not qualify for NIC allowance 3) I do not know - ask me later. My question is since we do not have any NIC liability , is it a good idea to claim Employment allowance and later on file an additional EPS? can some one please guide as to what are the pros and cons of picking choice 1 when setting up file for next tax year. If I look at the wording of these questions, it seems NO 1 is the correct choice but will be required to file an extra EPS. What are other ramifications of claiming employment allowance where you know you will not actually be able to use it? thanks
Replies (7)
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Claim
Select yes (presuming you meet the qualifying conditions) then stick both D's on £10k salaries (most tax efficient solution this year)
Much discussed
Generally - but not universally - agreed that £10000 is the best option. The directors pay NIC on their salaries but save Corporation Tax. You need to check it's right for your clients.
Claim if you're eligible
There's no downside to claiming the allowance if you aren't paying any NI, you simply won't benefit from it. Whether you should pay more to take advantage of it is an optimisation question, but there's no reason to not claim it.
EPS
The EPS is the medium that HMRC have chosen for employers to claim the allowance, that is why your first option leads you to submit and EPS - and it does seem that £10,000 is an optimum choice for salary this year although the total saving is not huge
Check if it's right for your clients
Lionfludesch has it right - each client must be considered separately - particularly if there is even only a modicum of taxed interest received. In this case, for instance, the optimum salary plus taxed interest received (grossed up) should together total £10,000, I'd have thought...
If there's one piece ....
If there's one piece of advice I'd offer to anyone it's to avoid making assumptions and do all the number crunching.
Unless that counts as two pieces of advice, obviously.
EA maths
Last month I set up an illustrative spreadsheet to assist with choosing an optimum salary in the light of the EA (Employment Allowance).
Here's the results (PER DIRECTOR): [ £10,000 as compared to £7956 pa]
Extra NICee of £ 245.28 (payable /4 = £ 61.22 per quarter to HMRC
Extra CT deduction of £ 2044 @ 20% = £ 408.80
NET SAVING = £ 163.28 for the year.
Note the cashflow timing - in year quarterly pasyments totalling £ 245.28 then CT reduction when CT is due 9 months later (for a 31 March 15 y/e).
For two directors the net saving is £163.28 x2 = £328.56.
For some employers they might find that there's extra admin or costs that outweighs the £163.52 tax saving ( 12 x EPS filings = extra work, some payroll software requires manual input of EA values each month rather than computing the EA itself ).