Director of Limited Co NI Class

Co Director NI classed as just a credit or paying?

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Hello, I have a client who is a Director of a limited company. They have been an employee of their own company for many years and paid themselves the basis salary (currently £758 pcm month) to tick the NI box for the pension and the rest they take as dividends. I have checked their HMRC record and it shows as 'full contrubutions' paid for all these years. Unfortunately they have been diagnosed with an illness which has meant they have had to stop working and tried to claim 'New Style ESA'. They have been told that they have been refused as they haven't paid enough class 1 or 2 NI to qualify for this benefit. 

Does anyone know if the Director takes the basic salary and ticks the NI box for pension, if this does not class as 'paying' NI and therefore will afffect NI based benefits. Is a 'credit' for NI not the same as a 'paid' NI ?

Thank you in advance. 

Replies (23)

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By zebaa
17th Jun 2024 10:01

Sorry, reply deleted, as I re-read the question & it provided the answer.

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Danny Kent
By Viciuno
17th Jun 2024 10:14

Quick google and the guidance suggests that a credit is sufficient to ensure eligibility in some cases. The second one down however it looks like you have to have actually paid NI, and not just received the credit.

https://www.gov.uk/guidance/new-style-employment-and-support-allowance#w...

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By FactChecker
17th Jun 2024 11:54

"Does anyone know if the Director takes the basic salary and ticks the NI box for pension, if this does not class as 'paying' NI and therefore will affect NI based benefits. Is a 'credit' for NI not the same as a 'paid' NI ?"

A 'credit' is NOT the same as 'paid' - although it will bring many of the same benefits (the most well known being SP).
But each benefit will have its own rules (i.e. there is no central definition across the board), so you need to get grips with 'new style' ESA if you want to answer your client's specific question.

Not my area of expertise but I'd have thought that DWP could explain the ins & outs?
Or https://www.gov.uk/employment-support-allowance/eligibility?step-by-step... covers Eligibility - which seems to suggest that 'credits' count (but that might only refer to Class 1 not Class 2 - it's not clear).

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By paul.benny
17th Jun 2024 12:06

This a version of something that came up all the time with the furlough subsidy (remember that?). People who engineered their earnings to minimise tax found they couldn't collect very much.

If Client had taken note and paid just a little more salary so as to pay class 1 NI, they would now be eligible for contribution-based benefits.

Sorry if that appears a bit self-righteous.

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Replying to paul.benny:
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By FactChecker
17th Jun 2024 12:38

Must confess that was my immediate reaction ... or 'ill-advised' to be more pithy.

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Replying to paul.benny:
By cfield
24th Jun 2024 10:41

Yes you are being self-righteous, and more than a bit. In fact, the whole tone of your post is extremely patronising and supercilious.

You are also wrong on both your 2 key points. Firstly, the furlough scheme wasn't even based on NI credits/contributions. It was 90% of earnings over the reference period and claimed by the employer, not the employee. In other words, it's totally irrelevant to this issue.

Secondly, as others have explained, the issue in this case was caused by the fact HMRC don't keep proper records of earnings for NI purposes, so in cases like this the NI credit falls through the cracks. It wouldn't have been prevented by paying NI. He was entitled to the ESA anyway.

Your whole post can be summarised as "Ha ha, serves him right for "engineering" his earnings and not paying any NI" so not really very helpful, was it. However, in terms of fairness, you might like to ponder how fair it is that until recently people working through their own companies had to pay a combined rate of 25.8% on earnings over £9,100 per annum. Also, that contributions-based benefits are very low and time-limited, so employees paying high levels of NI don't really get much back for their contributions, if we can still accurately call them that. As a final point, the link between how much NI you pay and your State Pension has now disappeared entirely after being gradually watered-down for decades. That went out of the window with SERPS and it's baby brother S2P, although you do of course get credit for past contributions to those schemes.

So you can't really blame owner-directors for "engineering" their earnings, can you?

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Replying to cfield:
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By FactChecker
24th Jun 2024 11:15

Without getting dragged into the minutiae of your statements (which I don't believe are of relevance to OP's scenario), you seem to be happy to 'engineer' payroll for your clients by reducing Payroll to the bare bones - based on your earlier post at https://www.accountingweb.co.uk/any-answers/smp-for-annually-paid-director

It's a valid approach, but not one (judging by the various comments there) with which many others would concur. So each to his own, eh?

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Replying to FactChecker:
By cfield
24th Jun 2024 12:05

I disagree, it's not each to his own at all. You must always act in your client's best interests, assuming you are in practice and have small limited company clients, whatever your own personal views, which may be coloured by politics. We are bound by ethics of course, but that is not in point here.

Basing salary for owner-directors on the NI Secondary Threshold (currently £9,100) or the Primary Threshold (currently £12,570) if more than one person on the payroll is standard practice for most accountants working with such clients, so whether you concur with it or not, that's what you should be doing if your clients are properly briefed and so wish you to do.

Of course, there are situations where that strategy is inappropriate or ill-advised so you have to take a holistic approach and be aware of all the facts.

If I was reducing payroll to the bare bones, I would advocate the LEL of £6,396 but that would be daft as it would put up corporation tax with no tax or NI saving elsewhere.

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Replying to cfield:
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By FactChecker
24th Jun 2024 12:59

Of course "You must always act in your client's best interests" ... but that doesn't mean having a one-size-fits-all solution that's applied to every client.

And 'best interests' covers a multitude of aspects (not just 'this year's tax bill'), which is why different practitioners may have a different perspective - even if they were both contemplating the same taxpayer (and had the same detailed knowledge of that person's circumstances).

So, yes it is 'each to his own' (unless you really think that there's always just one 'right solution' - in which case who needs advisors)?

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Replying to FactChecker:
By cfield
24th Jun 2024 14:49

I never said one size fits all, but for the majority of clients with their own small company, that is usually the best approach, so you could say one size fits most.

Nor did I say there is always just one right solution. If you read my post again, you'll see I acknowledged there are situations where that model is inappropriate or ill-advised.

That might be the different perspective you refer to, but then again, you imply that different practitioners might come up with different advice when they both have the same detailed knowledge of a client, which worries me, as clients shouldn't be getting different advice from different advisors. That undermines trust in the profession. So I wonder if, by perspective, you really mean morality or political opinion, which have no place in the world of tax advice.

Of course, there may well be different approaches depending on how willing the client is to pay higher rate tax, how much of it they can stomach, how overdrawn their loan account is, how much money they need to live on, etc, and then the best approach is a tailored one but with an eye on the tax implications.

At all times, it should be the client's decision guided by your frank and impartial advice, unsullied by any personal tax hang-ups.

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Replying to cfield:
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By FactChecker
24th Jun 2024 18:47

I feel this is verging into semantics for little purpose ...

"I never said one size fits all" ... but you DID say:
"Basing salary for owner-directors on the NI Secondary Threshold (currently £9,100) or the Primary Threshold (currently £12,570) if more than one person on the payroll is standard practice for most accountants working with such clients, *so whether you concur with it or not, that's what you should be doing* if your clients are properly briefed and so wish you to do."
I agree (who wouldn't) with the final 12 words ... but there was no point in the previous 4 lines (concluding with the injunction "that's what you should be doing") UNLESS you were suggesting that there's a 'one size fits all' default.

And FWIW my "getting different advice from different advisors" followed straight on from (and related to) my point that you seem to have skated over ... that 'best interests' covers a multitude of aspects (not just 'this year's tax bill')!

Or if you prefer the old cliché ... don't always let the tax tail wag the dog.

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By Yossarian
17th Jun 2024 14:28

The question is then, how much Class 1 Employees NI would someone have to pay in order to be to considered to have 'paid' some? I sometimes see a salary of £12579 paid, the logic being it's the most someone with a 1257L tax code can be paid before they actually have any tax deducted as the 'extra' £9 is ignored under PAYE. That seems to give a monthly ees NI figure of 2 pence! Would that count I wonder?

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By Bobbo
17th Jun 2024 15:17

I wonder if by 'credit', the guidance around New Style ESA actually means credits such as in https://www.gov.uk/national-insurance-credits/eligibility, rather than a credit having been received where salary is above LEL but below PT?

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By Daisyaccount
17th Jun 2024 16:06

Thank you for your replies.

After a lot of calls today, I think it comes to whether a Director's salary of £758 in 2022/2023 ticks the class 1 NI box....
It turns out that the client has a few months class 1 and class 3 (in 22/23) but they also had 12 months of Directors wages for that year at £758 pcm.

They had 2 jobs that year (both Directors) but their P60 shows the total earnt that year from the 2 jobs but the NI is only from 1 job because it says - "earnt in this employment" on the P60 not total for this year.

HMRC said I can update their records but it will take 43 weeks to update by which time the ESA claim will have expired. Plus I don't know what to send in for them as I only have P60 and a P45 for them with only one showing the limits.

Thank you !

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Replying to Daisyaccount:
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By FactChecker
17th Jun 2024 18:09

It's disgraceful (as I've been saying for years) that the P60 only shows values from 'In previous employments' for Income Tax and for nothing else.
And they've never bothered to hide their disdain for NICs which is why they are absent from P45s.

HMRC's 'excuse' is that Tax is the only deduction (usually) operated on a YTD basis ... but the reality is that they don't really care about NICs (or SxP or SL deductions), which have been sub-contracted to them for collection (but belong to other depts).

If you want to track down any EE class 1 contributions then you'll need a full set of Payslips (or of course the Payroll software used to make the EE payments).

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Replying to Daisyaccount:
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By Daisyaccount
17th Jun 2024 18:16

I think it is sorted now turns out that HMRC added class 1 to half the year but nothing for the other half before the Director changed companies because the payroll software was calculating NI annually but the Director left on month 6 so the NI had not been submitted to HMRC as it would have been submitted on month 12.

THANK YOU for all the replies on it just letting you know the result in case you come across this at some point.

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Replying to Daisyaccount:
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By Matrix
17th Jun 2024 18:23

So nothing to do with the bad advice of not actually paying NI?

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Replying to Matrix:
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By Daisyaccount
17th Jun 2024 18:39

No, Director's paying a lower salary and getting NI credits count as class 1. Credited or paid, it amounts to the same.

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Replying to Daisyaccount:
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By Matrix
24th Jun 2024 11:25

Thought so, thanks for confirming. I have no idea why everyone is being so sanctimonious.

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By whopkinscom
24th Jun 2024 09:32

When my Ltd is generating enough due to the whole inside/outside IR35 I pay myself a modest salary of around £24k p/a. That's enough to pay enough dues without being excessive to the exchequer. Give and take is what I say, give and take.

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By I'msorryIhaven'taclue
24th Jun 2024 11:20

A variation of the question - a spin-off, I suppose - that must surely occur is the effect on notional Class 1 contributions (towards state pension entitlement) when a director on the directors' standard annual earnings period method of NIC calculation (not on the misleadingly named alternative arrangements method, which is akin to a regular employee's NIC calculation) is employed by his company throughout the tax year and pays himself irregularly:

(i) £758 x 12 months = £9096 all in one lump, say in month 12?
(ii) £758 x 10 months, £0 on one month (say M6) but doubles up to £1,516 on another month (say M7)?
(iii) £1,047 x 11 months, £0 on one month?

Anyone know whether a director in the above three scenarios would be laughing all the way to his state pension pot?

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Replying to I'msorryIhaven'taclue:
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By FactChecker
24th Jun 2024 12:50

Even if you've flagged the 'alternative' (AL) method, then in M 12 the payroll software is supposed to automatically calculate using the 'annual or pro-rata annual earnings period' (AN) method (before deducting the amounts already paid earlier in the year).

What happens if, as per OP, the director has left *before* M 12 is unknown to me (in terms of how this is handled by different software packages) ... but what is *meant* to happen is reasonably clearly laid out in CA44.
https://assets.publishing.service.gov.uk/media/618256898fa8f5297f88d194/...

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Replying to FactChecker:
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By I'msorryIhaven'taclue
24th Jun 2024 13:20

Thanks FC, that's a useful link.

Ahead of that bedtime reading, I believe a full 12 months' payroll presence is essential. (So joining a payroll in May might well qualify the director for 11 months' NIC contributions; but not for the preceding April's contribution. I wonder how the 1st till 5th April periods are dealt with... we'll see!)

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