One man Ltd company & new employer NI rules.

[gmaz]

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

[jeremyc]

Same as this year, but pay yourself only £5,000. The rest in dividends and pension contributions.

[Terminator X]

jeremyc said:

Same as this year, but pay yourself only £5,000. The rest in dividends and pension contributions.

Eating st either way though due to Div Tax.

TX.

[Mandat]

gmaz said:

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

By keeping under the NI threshold, are you not causing yourself future state pension problems by not having enough fully paid up years?

[48k]

Mandat said:

gmaz said:

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

By keeping under the NI threshold, are you not causing yourself future state pension problems by not having enough fully paid up years?

You pay yourself enough to qualify for the employer and employee NI contributions amount of "nil". As per the OP that is currently a salary of £9100. At this level you still earn NI credits towards your state pension so your record remains full.

[JagLover]

48k said:

Mandat said:

gmaz said:

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

By keeping under the NI threshold, are you not causing yourself future state pension problems by not having enough fully paid up years?

You pay yourself enough to qualify for the NI contributions amount of "nil". You make you "nil" contributions therefore your NI record remains full.

Yes, but the issue is that this threshold is £6,396. So a salary of £5K means that this will not be a qualifying year for state pension contributions.

If you have an Accountant always best talking to them before deciding on correct split for tax purposes.

[trickywoo]

JagLover said:

Yes, but the issue is that this threshold is £6,396. So a salary of £5K means that this will not be a qualifying year for state pension contributions.

Your £6k figure is the lower earnings limit. The secondary threshold is £5k so will qualify.

[JagLover]

trickywoo said:

JagLover said:

Yes, but the issue is that this threshold is £6,396. So a salary of £5K means that this will not be a qualifying year for state pension contributions.

Your £6k figure is the lower earnings limit. The secondary threshold is £5k so will qualify.

gov said:

Qualifying earnings band - lower earnings limit (LEL)
Automatic enrolment into a workplace pension with the payment of both employee and employer contributions is intended to build on the foundation of State Pension entitlement. The LEL of the qualifying earnings band determines the minimum level of an enrolled workers’ earnings on which they and their employer have to pay contributions.

The Secretary of State has considered all review factors against the analysis and has decided to maintain the LEL at the 2024/2025 level. Therefore, the value of the lower limit of the qualifying earnings band for 2025/2026 will continue to be set at £6,240.

https://www.gov.uk/government/publications/review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-for-202526-supporting-analysis/review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-for-202526-supporting-analysis

[trickywoo]

Thanks for that I hadn’t appreciated the significance of the secondary threshold being below the lower earnings limit.

I found the information here easy to understand so may help others https://www.wtca.co.uk/blog/how-to-be-tax-efficien...

[jeremyc]

JagLover said:

Yes, but the issue is that this threshold is £6,396. So a salary of £5K means that this will not be a qualifying year for state pension contributions.

If you have an Accountant always best talking to them before deciding on correct split for tax purposes.

It's also worth noting that typically you require 35 qualifying years for a full state pension (though a lower proportion will be paid with as little as 10 qualifying years). OP may be in the position of already qualifying for a full pension, but obviously they should take advice on this.

You can check your NI contributions record here: https://www.gov.uk/check-national-insurance-record

[gmaz]

Mandat said:

By keeping under the NI threshold, are you not causing yourself future state pension problems by not having enough fully paid up years?

I'm already fully paid up.

jeremyc said:

Same as this year, but pay yourself only £5,000. The rest in dividends and pension contributions.

Yeah, but that means paying corporation tax on profits in order to pay myself dividends, and then being personally taxed on the dividends.

[jeremyc]

gmaz said:

jeremyc said:

Same as this year, but pay yourself only £5,000. The rest in dividends and pension contributions.

Yeah, but that means paying corporation tax on profits in order to pay myself dividends, and then being personally taxed on the dividends.

So don't pay yourself any dividends and just up the pension contributions.

For the scenario in your first post: £5,000 in salary, £9,000 paid directly by the company to your pension.

Of course this depends on whether you need access to cash from the business immediately.

Note also that there are limits on the amount the company can pay into your qualifying pension each tax year tax free. However, you will be far from next year's cap of £60,000.

[Shnozz]

jeremyc said:

o don't pay yourself any dividends and just up the pension contributions.

For the scenario in your first post: £5,000 in salary, £9,000 paid directly by the company to your pension.

Of course this depends on whether you need access to cash from the business immediately.

Note also that there are limits on the amount the company can pay into your qualifying pension each tax year tax free. However, you will be far from next year's cap of £60,000.

This is interesting. I thought pension contributions were limited to a sum equal to the salary. Is that not correct?

[jeremyc]

Shnozz said:

This is interesting. I thought pension contributions were limited to a sum equal to the salary. Is that not correct?

There's plenty of information out there on this (including gov.uk).

One example:

getpenfold.com said:

As a limited company director, your business can contribute to your pension without the salary restriction that other sole traders or self-employed workers face. Contributions to your pension are tax-free up to £60,000 a year (for the 2023/2024 tax year onwards), even if your profits total less than £60,000. Contributions above this limit will be subject to a tax charge.

If you have a significant amount to contribute, you may be able to use the carry forward rules. This allows you to use any unused annual allowance from the previous three years, provided you were a member of a registered pension scheme during that time. You must first use your full annual allowance for the current tax year before using any unused allowances from the previous three years.

I should point out that I am not an accountant, pensions or financial advisor so get your own qualified advice. I am, however, a limited company Director.

[Shnozz]

Cheers chap. That’s very welcome news for me. Ta muchly.

[gmaz]

jeremyc said:

o don't pay yourself any dividends and just up the pension contributions.

Would that be my pension that has dropped in value £4000 last month :-/

I'd rather have the money to use.

[trickywoo]

gmaz said:

Would that be my pension that has dropped in value £4000 last month :-/

I'd rather have the money to use.

I'm 'down' £40k on peak due to the Trump effect of the last month. Still up overall and don't forget it would have cost you 20% minimum upfront (taxes) to have the money to use.

[MaxFromage]

gmaz said:

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

As usual the Government have made a complicated situation even more complicated. It's best you speak to your accountant who can give you an answer based on all the variables as profit levels, rates and total income all have a bearing on the answer.

[Silverage]

gmaz said:

jeremyc said:

o don't pay yourself any dividends and just up the pension contributions.

Would that be my pension that has dropped in value £4000 last month :-/

I'd rather have the money to use.

You can’t have it both ways sadly.

I’m in a similar boat to you for next year. I’m going to drop the salary I draw from the company down to £5000 to avoid paying the extra employers NI. I have a couple of pensions that will start paying out when I am 60 in September and these will nicely use up the rest of my tax free allowance. Extra profit from the company will then all go into another pension.

I used to take £5000 out as dividends. For next year I worked out what it would cost me in corporation tax and dividend tax (19% and 7.5%) vs the employers NI and personal income tax (15% and 20%) if I took it as salary. The former was easily the most cost effective way.

[Rufus Stone]

gmaz said:

I have a Ltd company doing part time work that brings in about £14K a year. Up to now I have paid myself £9100 a year to keep under the employers and employees NI threshold, the remainder going to dividends and pension contributions. But from the next tax year the employer's threshold drops to £5K. No other income (I'm semi retired)

What's the best option to pay myself in the next tax year?

If you have no other income, wouldn't you be best to pay £12,500 salary and incurring the employer NI? The NI is less than the corporation tax.