Optimum salary

Two or more associated companies

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Two trading companies are under common control and each makes more than £25k per year profit before salaries. Of the owners, one is a director of both companies, the other simply an employee. 

I reckon that each person, in each company, should be paid between £6396 and £9100 per year to ensure state pension entitlement but also to keep out of employer's national insurance. The total salaries will exceed £12570 but that's OK as the excess will be taxed at 20% whilst the companies obtain relief at a marginal 26.5%. 

Assuming no other income bar dividends from those companies...have I missed anything?

 

 

Replies (14)

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By D V Fields
07th Apr 2024 13:00

Yes.
What are the separate objectives of the companies and what are the separate objectives of the individuals?

Once you’ve answered that am sure you can work the tax implications for yourself, remembering to take into consideration all other relevant factors.

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JCACE
By jcace
07th Apr 2024 13:34

Assuming that he or she is over 21 years old, I reckon the employee should be paid at least £11.44 per hour to comply with National Minimum Wage regulations

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By Matrix
07th Apr 2024 14:15

I would just run one payroll and pension scheme. There would probably only be one employment allowance/one NI nil rate band anyway.

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Replying to Matrix:
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By Paul Crowley
07th Apr 2024 17:33

That was my first thought
You cannot have connected companies for each day of the week getting NI relief and EA for each one.
But it is ages since I looked this up.

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Replying to Paul Crowley:
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By FactChecker
07th Apr 2024 20:47

If by "NI relief" you mean the band of 'earnings at or above LEL up to and including secondary threshold' (with a rate of 0% for ER's Secondary Class 1 contributions) ... then I believe this applies to the earnings of each EE within a single ER (on a single PAYE scheme) - irrespective of whether there are any connected companies.

Whereas the connected companies rule definitely does kick in with respect to any attempt to claim EA - where only one of the connected companies can make the claim (and that limitation applies to the whole of the tax year in question even if that fails to 'use up' the full capped 'allowance').

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Replying to Paul Crowley:
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By Matrix
07th Apr 2024 21:32

The employments would be aggregated. Sounds a bit complicated. Shared costs can be addressed in other ways.

https://www.gov.uk/guidance/what-to-do-if-your-employee-has-more-than-1-job

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Replying to Matrix:
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By FactChecker
07th Apr 2024 23:00

Ah OK, not 'connected companies' but one or more companies 'carrying out business in association' with each other ... different criteria.

I used to have to do a lot of that 'aggregated earnings' in the days when running payrolls for hundreds of schools/colleges - which was actually mostly fairly simple to achieve because the earnings (whether salaries or hours or both) tended to come into one central hub. So whether employee had multiple jobs in one school or across multiple schools (latterly Academies), we could allocate those to 1st/2nd job etc before processing and then spit the results out to one or more PAYE schemes as indicated by the 'owner' of each job.

But as that link (which is so old it almost pre-dates RTI) says, many people choose not to bother, relying on the get-out of being prepared to show HMRC that it’s not ‘reasonably practicable’ for them to do all this.

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Replying to Matrix:
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By johnthegood
08th Apr 2024 06:31

Matrix wrote:

The employments would be aggregated.

Thats not a given based on what we have been told by the OP, does need investigation though before you go ahead.

You could quite easily have 2 different companies with a common Director that are in no way "Businesses in association"

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Replying to johnthegood:
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By Matrix
08th Apr 2024 07:09

It says in the title they are associated. Anyway the OP can do their calculations.

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Replying to Matrix:
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By johnthegood
08th Apr 2024 13:37

Matrix wrote:

It says in the title they are associated. Anyway the OP can do their calculations.

Ahh yes, but we all know that "associated" means very different things to different people.

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DougScott
By Dougscott
07th Apr 2024 14:26

Or pay £12570 foreach in each company and claim Employment Allowane in one company?

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By FactChecker
07th Apr 2024 15:00

".. have I missed anything?"

In addition to the important point made by D V Fields, which really should trump what appears to be an entirely tax-driven decision, there are loads of undisclosed data points:
- Presumably both companies are UK incorporated and trade from the UK?
- How are the two companies different and do they ever trade with each other?
- Are the 'owners' 50:50 shareholders (i.e. no other shareholders) in each company?
- What is the (non-business) relationship between the two co-owners?
- Why does each company apparently only have a sole Director (unwise risk)?
- As hinted by jcace, what is the age of the employee (and what working hours)?
- What is nature of business (i.e. is tax on extraction the only relevant tax)?
- and on and on ...

This is either the simple mechanistic question you've posed (in which case the calcs are basic enough), or you may not be seeing the wood for the trees.

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Replying to FactChecker:
DougScott
By Dougscott
07th Apr 2024 16:14

I read it as he just wants to know the most tax efficient salaries, all things being equal.

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Replying to Dougscott:
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By FactChecker
07th Apr 2024 20:52

In which case, as I said, the calcs are basic enough not to need anyone's help - especially as I don't intend to write down all the assumptions that go into making the calc the 'basic' model (since 'all things are rarely equal' in real life).
Without those, someone who knows no better may make the wrong decisions.

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