Directors Class 1 Contributions

[anarchist]

Hi there,

I am trying to represent the Employers National Insurance that will have to be paid by my business on my earnings as a Director in my cashflow forecast ahead of applying for a business loan. I have tried to read the HMRC website information and I find it really confusing, because I have no cash I am not in a position to hire an Accountant so I will need to manage it myself.

I understand there is about three different calculation rates (upper earnings limit, lower earnings limit and something else) which I don't really understand. If someone could advise the best way of working it out for someone who struggles with dyscalculia (maths dyslexia) that would be really kind.

Thanks for your help!

[Tom McClelland]

As a rule of thumb, reckon on paying about 24% of your annual pay that exceeds £5700. 11% of that comes out of your pay as employee's NI, while 12.8% is on top of your pay as employer's NI.

Most accountants here will suggest that you pay yourself c. £5700 in pay and the rest in company dividends, thereby avoiding NI altogether while still getting a full NI stamp for pension purposes.

[anarchist]

Hi Tom,

Thanks for your reply,

What happens if I pay myself less than £57,000 per annum - I am looking to take out a loan through the North West Development Fund and I feel that I will have a much better chance of getting the loan if I pay myself less at least until I can prove that I can make the profits.

If I paid myself less than £57,000 would I still get the full NI stamp and what exactly is this?

Thanks for your time and help!

[Tom McClelland]

Hi Tom,

Thanks for your reply,

What happens if I pay myself less than £57,000 per annum - I am looking to take out a loan through the North West Development Fund and I feel that I will have a much better chance of getting the loan if I pay myself less at least until I can prove that I can make the profits.

If I paid myself less than £57,000 would I still get the full NI stamp and what exactly is this?

Thanks for your time and help!

I said £5,700, not £57,000. The full NI stamp refers to your accrued rights to a state retirement pension, which build up for each year that you work and earn above the NI earnings limit.

For tax reasons you probably shouldn't take a salary greater than £5,700 assuming that you own 100% of the company, because taking the profits as dividends results in lower tax than if you had paid yourself the profits as salary.

[anarchist]

Hi Tom,

That's where my dyslexia kicks in!! Sorry about that. I am planning on taking £18,000 a year before tax. Am I right in presuming that 11% will have to be paid on top of that personally and 12.8% will have to be paid by the business? Are there any benefits to paying this monthly/yearly or by some other frequency and how do you make the payments? I have to take a monthly salary in order to support myself because of personal circumstances.

I tried to Email HMRC about this and they refused to help me by Email and just told me to get an Accountant - although I cant afford this.

Thanks again.

[Tom McClelland]

Hi Tom,

That's where my dyslexia kicks in!! Sorry about that. I am planning on taking £18,000 a year before tax. Am I right in presuming that 11% will have to be paid on top of that personally and 12.8% will have to be paid by the business? Are there any benefits to paying this monthly/yearly or by some other frequency and how do you make the payments? I have to take a monthly salary in order to support myself because of personal circumstances.

I tried to Email HMRC about this and they refused to help me by Email and just told me to get an Accountant - although I cant afford this.

Thanks again.

You don't pay the 11% on top the £18k, you pay it out of the £18k, same as your company deducts your PAYE tax out of the £18k. Then the company pays the 12.8% on top of the £18k, adds it to the 11% it deducted from you, and that is how much NI is payable to HMRC.

Broadly it will make little difference, other than in timing, how you often pay yourself salary. Director's NI rules are designed to get the same total NI from you no matter how you structure your salary payments.

If your company is profitable you really should pay a mixture of salary and dividends. There is no reason why you can't do this monthly as long as the profits are real, and you should do it because the dividends escape NI. Otherwise you're just needlessly giving severalk a year to HMRC. This is where advice from an accountant will save you more than the accountancy fees, and often they'll start you off and point you in the right direction for free, or a very minmal sum.

[Tom McClelland]

By the way, if you're asking questions like this you have no chance of successfully doing the year-end corporation tax and companies house paperwork for your company. Really that is a job that can only be attempted by a professional accountant. Why not engage one now and get everything started off on the right foot, rather than discovering later that you need a time machine to sort out the errors. If you contact some of the regular accountants who post on this board you may be surprised at how little it costs.

But don't ask them technical questions by Private Message until you've engaged them to act for you. Quite understandably they can get annoyed by that.