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Using the Employment Allowance for husband-wife co

What is most efficient way for using the Employment Allowance for husband-wife company?

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Husband is sole director of his limited company, his wife is not a director but has equal shareholding and is employed by the company to do admin. Net profit before paying salary is £100k. The company therefore qualifies for £4000 Employment Allowance to use against Employers NIC liability for the tax year. Assume that after paying salary the remaining taxable profit is taxed at 19% and remaining funds are drawn as dividend and taxed at 7.5%.

My calculations suggest that paying each director c.£23250 salary (all NIC'ers covered by allowance, £1642 NIC'ees) results in an overall tax liability of £16699 whereas paying each director £9568 (no Employer or Employee NIC due) results in an overall tax liability of £20276. That seems a considerable saving of £3577 and I've checked this a couple of times.

Have I missed something here?

Replies (17)

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Danny Kent
By Viciuno
07th Dec 2021 15:05

Are you taking into account the IT that would be due on the salary? So comparing the take home in both scenarios?

Thanks (1)
DougScott
By Dougscott
07th Dec 2021 15:15

A very good point - I thought that couldn't be right!

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Replying to Dougscott:
RLI
By lionofludesch
07th Dec 2021 15:25

Dougscott wrote:

A very good point - I thought that couldn't be right!

You were right.

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Replying to Dougscott:
A Putey FACA
By Arthur Putey
07th Dec 2021 16:16

Don't forget to also include the dividend tax in your modelling too if the lower salary is topped up with higher dividends!

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DougScott
By Dougscott
07th Dec 2021 18:25

Yes, thanks I had at least included the dividend tax. I think utilising some of the Employment Allowance and paying the salary at the primary threshold £9568 (no employee or employer NI) and the net retained profits as dividends taxed at 7.5% is the most tax efficient (all other considerations aside!).

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Replying to Dougscott:
JCACE
By jcace
07th Dec 2021 19:34

Have you considered the position if each was paid an amount equivalent to the personal allowance?

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Replying to Dougscott:
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By Hugo Fair
07th Dec 2021 22:51

I must be missing something in your logic/assumptions.

Employment Allowance isn't actually an allowance. It's a capped amount that can be used (subject to eligibility) to reduce an Employer's annual NI liability.
"You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner".

Also, there are several aspects of eligibility but a key one is that at least one employee who is not a director is paid above the Class 1 NI secondary threshold.

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Replying to Hugo Fair:
RLI
By lionofludesch
07th Dec 2021 23:24

Hugo Fair wrote:

I must be missing something in your logic/assumptions.

Employment Allowance isn't actually an allowance. It's a capped amount that can be used (subject to eligibility) to reduce an Employer's annual NI liability.
"You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner".

Also, there are several aspects of eligibility but a key one is that at least one employee who is not a director is paid above the Class 1 NI secondary threshold.

The logic is fundamentally flawed big-style, to be fair.

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Replying to lionofludesch:
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By Paul Crowley
08th Dec 2021 00:34

The missing item is:

Do the employees have any other income?
Me and my partner play this game every year with a multitude of options

Trouble is Op does not trust my opinions, and probably also TD's

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Replying to Hugo Fair:
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By Wanderer
08th Dec 2021 07:45

Hugo Fair wrote:

Also, there are several aspects of eligibility but a key one is that at least one employee who is not a director is paid above the Class 1 NI secondary threshold.

You sure about that?
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Replying to Wanderer:
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By Hugo Fair
08th Dec 2021 11:37

Well I'm sure that's how I've always interpreted:
"You also cannot claim if both of the following apply:
* you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold
* the employee is also a director of the company"

https://www.gov.uk/claim-employment-allowance/eligibility

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Replying to Hugo Fair:
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By Wanderer
08th Dec 2021 12:10

You need to look at how that fits in with what you said above (clue: it doesn't).

Anyway stop reading .gov.uk & look at the legislation & see if you reach the same conclusion (clue: you shouldn't).
https://www.legislation.gov.uk/ukpga/2014/7/section/2

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Replying to Wanderer:
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By Hugo Fair
08th Dec 2021 13:07

Well as the saying goes IANAL but, although I'm not generally a fan of the Noddy-like simplification that results when GOV.UK gets its hands on guidance ...

The NIC Act to which you've directed me says, under Employment Allowance (section 2 - Exceptions):

[Excluded companies
(4A) A body corporate (“C”) cannot qualify for an employment allowance for a tax year if—
(a) all the payments of earnings in relation to which C is the secondary contributor in that year are paid to, or for the benefit of, the same employed earner, and
(b) when each of those payments is made, that employed earner is a director of C.]

So ... the GOV.UK version (that a company, with a single Director who is the only EE paid above class 1 NIC secondary threshold, is not eligible) is as usual correct albeit over-simplified.
I presume what you're querying is that my statement "at least one employee who is not a director is paid above the Class 1 NI secondary threshold" should better have read "at least one employee who is not *the sole* director of the company is paid above the Class 1 NI secondary threshold"?

If so, I hold my hands up to sloppy language ... or am I missing something more basic?

EDIT: Crossed with lion's and dugimmon's helpful posts pointing out exactly that as the error. Full retirement can't come too soon if I've started on the slippery slope of poor (and incorrect) phraseology! :-)

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Replying to Hugo Fair:
By Duggimon
08th Dec 2021 12:22

Two directors paid above the secondary threshold meet the quoted requirements but do not meet the more restrictive version you initially posted!

Anyway, my take is, with no other income, you probably come out slightly ahead by paying up to the PA in salary, but it may not be worth the hassle of making and possibly missing the PAYE payments through the year.

Thanks (1)
Replying to Hugo Fair:
RLI
By lionofludesch
08th Dec 2021 12:33

Hugo Fair wrote:

Well I'm sure that's how I've always interpreted:
"You also cannot claim if both of the following apply:
* you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold
* the employee is also a director of the company"

https://www.gov.uk/claim-employment-allowance/eligibility

I think if you read that again you may change your mind.

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By Bobbo
08th Dec 2021 14:33

Dougscott wrote:

Husband is sole director of his limited company, his wife is not a director but has equal shareholding and is employed by the company to do admin.

Dougscott wrote:

My calculations suggest that paying each director c.£23250 salary (all NIC'ers covered by allowance, £1642 NIC'ees) results in an overall tax liability of £16699 whereas paying each director £9568 (no Employer or Employee NIC due) results in an overall tax liability of £20276. That seems a considerable saving of £3577 and I've checked this a couple of times.

Have I missed something here?

Is wife a director or not?

Also, what is the value of the 'admin' carried out by wife? If it's only £9,568 and they receive a salary of £23,250 then i'm sure you will of course be adding back £13,682 in the CT computation as not W&E.

Thanks (2)
RLI
By lionofludesch
10th Dec 2021 10:26

It doesn't fit these particular circs but the game changes once you've got enough staff to exhaust your £4000 allowance.

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