Salary versus Dividends – National Insurance – does age matter?
You can see our last post covering the non-tax factors of the small salary, big dividends tax plan here.
Every business wants to make as much money as possible, so to pay yourself the most tax efficient mix of salary and dividends is a desired plan of action. The Salary versus Dividends strategy is therefore a popular tax planning technique for all company owners and directors, regardless of age.
However, National Insurance is one tax matter that can prove a difference.
Nowadays, you can become a Company Director over the age of 16. Once you turn 16 you also become subject to employee’s National Insurance. However, for young directors under the age of 21, there is no employer’s national insurance payable on your salary. Unless, your salary exceeds the higher-rate threshold, currently £46,350, in England, Wales or Northern Ireland. This means, you will have to pay 40% tax on any amounts above £46,350 to £150,000. For those that live in Scotland, you will have to pay the higher-rate band of £41% tax on amounts above £43,430 to £150,000.
For a Company Director over the State Pension age, there is no employee’s national insurance payable on your salary. Your State Pension age is calculated from your gender and date of birth, you can check your State Pension age here. However, Employer’s National Insurance is still payable for older directors. As as word of advice, if you have other income for example, a state pension, please do consider it when deciding how much salary to pay yourself. In most cases, if employer’s national insurance is payable, past experiences have shown a lower salary is more tax efficient than a higher salary.
How do I receive National Insurance Free salaries?
A Company Director can receive a substantial salary with no National Insurance payable at all if they match the following categories:
- The Company Director is over the State Pension age
- The Company Director has spare Employment Allowance
Employment Allowance: Employers can have a reduction of up to £3,000 a year off their National Insurance. To see how you can claim Employment Allowance, please click here.
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We have created several posts surrounding the small salary, big dividends tax planning technique including potential dangers, non-tax factors and National Insurance for further reading here.