Firstly I would like to explain that I am not an accountant, however I do have a keen interest in and understanding of basic tax matters. I am looking to "engage" an accountant for a new company I have formed and have consulted with various individuals, however a question has arisen as part of my own tax plan and I am receiving conflicting answers from experienced, well respected accountants. I am not here to seek free tax advice, merely to try to clarify the matter. If anyone can assist it would be greatly appreciated.
- I am currently employed PAYE and pay tax and NI at basic rate (20% + 12%)
- I have a small sole trader business that makes very little profit (<£1k)
- I am the director of a limited company.
My tax plan for withdrawing profits from the limited company was:
1 - pay a salary of around £8,400 per year to cover directors duties
2 - draw dividends that bring my total combined income up to £46,350.
I was expecting to pay 20% income tax and 0% employee/employer NI on the directors salary as it is below the Primary Threshold, and then to pay 7.5% dividend tax on the dividend issue. One accountant has indicated that this approach is perfectly acceptable, however another accountant indicated that the NI rate applied to the directors salary would be determined by that directors combined annual income from all sources of employment, therefore incurring employee and employer contributions on every £ paid.
HMRC guidance on the matter is unclear; they state that all payments made to the director would be combined when considering the NI rate but only from that employment. No HMRC guidance that I can find clearly outlines the situation when a director has 2 PAYE salaries from completely unrelated employments. Yet it appears that a regular employee would benefit from 0% NI rates up to the PT on as many employments as they hold.
One piece of guidance indicates that directors NI is treated differently to an employee’s in so much as it can be assessed on a cumulative basis, but it doesn't explain the above, and I can see how a misunderstanding could arise.
Your feedback would be most appreciated. Having sought accountancy advice and searched HMRC documentation I am still at a loss.