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R&D – impact on director remuneration
Example
You are the sole director in a company that undertakes some R&D. The annual profit is estimated at £140,000 for the year ended 31 March 2016 before taking into account the director’s remuneration.
You might think that the most tax-efficient remuneration package is £10,600 for 2015/16 to cover the personal allowance and then net dividends of £28,606 to take the director up to the basic rate band. You also need to consider whether the company can make an R&D relief claim and, if it can, how this might affect your decision.
Salary vs Dividends
If the director takes a typical remuneration package, then the net tax and NI savings over taking a salary of £39,206 would be £5,265, assuming the £2,000 employment allowance is available. This saving is made because dividends received within the basic rate band attract no further income tax plus no NI for the director or the company. This more than outweighs the additional corporation tax suffered on profits retained for dividends.
Taking R&D relief into account
From 1 April 2015 the R&D tax credit for SMEs increased from 225% to 230%. There is no R&D uplift on dividends received – only on salary. This means that paying a £39,206 salary would actually result in a saving over taking a small salary and dividends of £1,208.
What about a larger salary? In fact, if the client wanted to take out more than the basic rate band, then the salary may become even more tax efficient. A £70,000 salary would result in net tax/NI due of £1,366 after the R&D relief (assuming there was sufficient profit to offset the CT relief), whereas a salary of £10,600 and net dividends of £59,400 would result in net tax/NI of £5,883 – so the saving by taking a salary over dividends is £4,517.
HMRC will generally not accept 100% of a director’s salary costs within the R&D claim unless it can be clearly demonstrated that the director was exclusively involved in R&D activity.
Pension contributions
While dividends don’t qualify as eligible staff costs for R&D claims, company pension contributions do. New pension freedoms make pension contributions a much more attractive option, so you might want to consider this as part of your remuneration package.
If a company makes pension contributions of £40,000 for the director and they spend 60% of their time on R&D, the R&D relief on this will be £55,200 (£40,000 x 60% x 230%). This means that the overall CT saving on the pension contribution will be £14,240 (((£40,000 x 40%) + £55,200) x 20%). As there’s no NI due on pension contributions, this is an even more efficient option than taking additional salary.
Get the best deal for yourself
For advice on the best split between salary and dividends or help with setting up a limited company and registering for VAT, please contact Alterledger.
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New Childcare Vouchers from Autumn 2015
Childcare vouchers to be withdrawn for new employees
The existing benefits available in the form of childcare vouchers to employees will be withdrawn to new entrants in the Autumn of 2015. The current scheme saves National Insurance contributions for both employers and employees. Employees also save income tax.
English: British National Insurance stamp. (Photo credit: Wikipedia)
New scheme to start in Autumn 2015
The new scheme for childcare vouchers will not be as good for many employees who currently benefit from the current scheme, but where both parents work and are self employed, they can get the government to pay £2,000 towards registered childcare.
How do I set up childcare vouchers?
Childcare vouchers are set up through your payroll scheme and must be available to all eligible employees to receive the tax benefit.
Alterledger can help
For more information on saving employer’s national insurance and preparing for changes to childcare vouchers, contact Alterledger or visit the website alterledger.com.
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Letters for under 21s
Changes for employees under 21
From 6th April 2015 employer national insurance contributions will be abolished for under 21s. If you employ anyone over 16 and under 21 years old you will need to use one of the new letters for under 21s in the national insurance category setting of your payroll software.
English: British National Insurance stamp. (Photo credit: Wikipedia)
Secondary contribution rates
This table shows how much employers pay towards employees’ National Insurance for tax year 2014 to 2015. The contribution rate calculated by your payroll software is set by the category letter.
| Category letter | £111 to £153
a week |
£153.01 to £770
a week |
£770.01 to £805
a week |
From £805.01
a week |
|---|---|---|---|---|
| A | 0% | 13.8% | 13.8% | 13.8% |
| B | 0% | 13.8% | 13.8% | 13.8% |
| C | 0% | 13.8% | 13.8% | 13.8% |
| D | 3.4% rebate | 10.4% | 13.8% | 13.8% |
| E | 3.4% rebate | 10.4% | 13.8% | 13.8% |
| J | 0% | 13.8% | 13.8% | 13.8% |
| L | 3.4% rebate | 10.4% | 13.8% | 13.8% |
National insurance categories
Most employees will have a category letter of A or D depending on whether or not they are in a contracted-out workplace pension scheme. There are categories for mariners and deep-sea fisherman; the more common categories are shown below:
Employees in a contracted-out workplace pension scheme
| Category letter | Employee group |
|---|---|
| D | All employees apart from those in groups E, C and L in this table |
| E | Married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| L | Employees who can defer National Insurance because they’re already paying it in another job |
Employees not in contracted-out pension schemes
| Category letter | Employee group |
|---|---|
| A | All employees apart from those in groups B, C and J in this table |
| B | Married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| J | Employees who can defer National Insurance because they’re already paying it in another job |
Employees in a money-purchase contracted-out scheme
This kind of scheme ended in April 2012 but some employees might still be part of one.
| Category letter | Employee group |
|---|---|
| F | Tax years before 2012 to 2013 only: all employees apart from the ones in groups G, C and S in this table |
| G | Tax years before 2012 to 2013 only: married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| S | Tax years before 2012 to 2013 only: employees who can defer National Insurance because they’re already paying it in another job |
How to claim zero rate of employer contributions
You should already have proof of age for all your employees. A copy of a passport, driving licence or birth certificate will be required to show that your employee qualifies for the new zero rate of employer’s contribution. The seven new categories are valid from 6th April and must be applied from the first salary payment after 5th April 2015 to benefit from the new zero contribution rate for employers.
What does this have to do with Auto Enrolment?
You need to have proof of age for all your employees aged under 21 to claim the zero contribution rate for employer’s National Insurance. By the time of your staging date you must assess all your workers, based on their earnings and age. To help you prepare for Pension Auto Enrolment you can make sure that all your employee records are up to date and that your payroll software has the full details for all workers including their date of birth. This is a good opportunity to clean up all your employee data.
Alterledger can help
For more information on saving employer’s national insurance and preparing for Pension Auto Enrolment, contact Alterledger or visit the website alterledger.com.
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Will you pay Class 3A NI to top up your Pension?
From 12 October 2015 to 5 April 2017 you’ll be able to make a ‘Class 3A voluntary contribution’ to top up your State Pension by up to £25 per week.
You can choose to top up your State Pension by between £1 and £25 per week. How much you’ll need to contribute depends on:
- how much extra pension you want to get each week
- how old you are when you make the contribution
Example You are 68 years old in October 2015. You decide that you want to get an extra £5 per week (£260 a year) on top of your pension.
The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5.
You’ll make a lump sum payment of £4,135.
You can use this calculator to see how it works…
https://www.gov.uk/state-pension-topup
Here is a link to the legislation…
http://www.legislation.gov.uk/ukdsi/2014/9780111121689/contents
steve@bicknells.net
Say goodbye to small earnings
Say hello to small profits
HMRC has changed the name of the threshold for paying Class 2 National Insurance from the Small Earnings Limit to the Small Profits Threshold. If you earn less than £5,965 in 2015-16 you won’t need to pay Class 2 NI, but if you do, it will be calculated as part of your 2015-16 tax return and due with the rest of your tax by 31st January 2017.
English: British National Insurance stamp. (Photo credit: Wikipedia)
Alterledger can help
For more information on filling in your tax return, contact Alterledger or visit the website alterledger.com to see if you can organise yourself better and cut your tax bill.
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Self Employed National Insurance
Changes to payment of National Insurance
HMRC has announced changes to the way that the self-employed will pay their Class 2 and Class 4 National Insurance Contributions (NIC). This is not the first time the process has changed. Some people still refer to paying their stamp – in days of old you had to buy special stamps for your NIC!
English: British National Insurance stamp. (Photo credit: Wikipedia)
No new direct debits
Until recently I would have encouraged the self-employed to set up a Direct Debit Instruction (DDI) with HMRC to pay their Class 2 NIC. From April 2015 HMRC will calculate the NIC due from your self-assessment tax return.
Deferment of National Insurance Contributions
If you currently defer NIC, you don’t need to re-apply to do so. HMRC will be sending out letters in December to everyone who currently defers NIC to confirm this. Any new applications to defer NIC will not be processed. For more information on National Insurance for the Self Employed please go to my blog post here: Class 2 NIC.
Alterledger can help
For more information on filling in your tax return, contact Alterledger or visit the website alterledger.com to see if you can organise yourself better and cut your tax bill.
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Have you paid too much National Insurance?
Unlike Income Tax which is cumulative and assessed across all earnings, National Insurance starts from zero on each individual employment and you also pay National Insurance on Self Employed earnings.
So if you are a Director of multiple businesses paid as an employee its easy to see how you could over pay and you might not even realise because National Insurance is not shown on your Self Assessment Return.
You can also over pay National Insurance if you are a part time employee with multiple employers and irratic earnings, this because National Insurance is calculated on a weekly/monthly basis, not a cumulative basis and its by employer.
What you need to do
Write to HM Revenue and Customs confirming:
- your National Insurance number
- why you’ve overpaid
- the tax year(s) you’ve overpaid
You should include your P60 or a statement from your employer showing the tax and National Insurance for each year you’re claiming for.
You should apply within 6 years of the tax year you’re claiming for.
HM Revenue and Customs
Payment Reconciliation
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ
steve@bicknells.net
