The 2022 Spring Statement increased the NI threshold, however the way this has been done is not straightforward. How does the change affect small company’s profit extraction planning for 2022/23? Head of Payroll Joanne Gibson provides detailed advice.
The Chancellor committed to this rise on the basis that health and social care needs to be properly funded. However, he did announce an increase in the payment thresholds for Class 1, 2 and 4 NI. These will all increase to the same level as the personal allowance, i.e. £12,570 for 2022/23. Unfortunately, the mechanics of the change are more complex than first meets the eye.
As the change was announced so close to the start of the 2022/23 year, it did not take place from 6 April. Instead, it will take effect from 6 July 2022 to give payroll software providers time to make amendments. It will not be retrospective. This means that two sets of thresholds will apply in 2022/23.
For the three months, or 13 weeks for weekly payrolls, up to and including 5 July 2022, the primary Class 1 threshold will use the originally planned threshold of £190 per week, or £823 per month. From 6 July it will increase to £242 per week, or £1,048 per month. Because NI is not cumulative, an employee paid monthly with a salary equivalent to the personal allowance, i.e. £12,570, would incur NI in the first three months of the year, but nothing afterward.
The secondary threshold for employer contributions has not increased and will remain at £9,100 for the whole of 2022/23.
However, the employment allowance for secondary contributions was increased from £4,000 to £5,000 with effect from 6 April.
For the self-employed, Class 4 and Class 2 are payable by self-assessment and so subject to annual thresholds rather than weekly or monthly. The payment thresholds have been increased in line with the Class 1 primary threshold. However, because this takes place partway through the year, an apportionment is needed. For Class 2, the lower profits limit for 2022/23 is £11,908. This is equivalent to using the old £9,880 threshold for three months, and the new £12,570 threshold for nine months.
There is an additional change with Class 2. Usually, this is only payable where profits exceed a small earnings exception, which for 2022/23 is £6,725. This small earnings exception has not increased. However, where profits exceed the exception, but do not exceed the lower profits threshold for Class 4, i.e. £11,908, a 0% band applies. No payment of contributions will be required, but you will accrue entitlement to relevant state benefits, including the state retirement pension.
Small company owners
For those of you that operate businesses through limited companies, the most pressing concern may be the profit extraction strategy for the year in the wake of the changes. By default, directors are subject to an annual earnings period rather than weekly or monthly periods, irrespective of when any money is actually transferred.
It is possible for directors to opt for an alternative basis which spreads any NI through the year. That wouldn’t be helpful in this case though.
The simple position is that the director will have an annual Primary Class 1 threshold of £11,908. However, care will need to be taken over the timing of payments. For NI purposes, directors’ earnings are measured on a cumulative basis, and primary Class 1 NI contributions will be payable once the cumulative earnings exceed the relevant threshold. As a result, if a salary of more than £9,880 is taken before 6 July, NI will initially be payable. This will be reconciled later in the year once the threshold increases but will cause a cash-flow inconvenience in the meantime.
The problem can be mitigated by lending the money and using the director’s loan account where funds are needed prior to July.
Optimising the position
Having established the mechanics of the NI changes, your next question will probably be what the optimum salary to take will be. As in previous years, where the employment allowance is available it will remain most efficient to take a salary equal to the personal allowance, i.e. £12,570. A small amount of employees’ NI will be payable on this (£89), but the corporation tax relief compared to, for example, restricting the salary to a secondary threshold amount will more than make up for this. But what if the employment allowance isn’t available, i.e. it’s a single director company with no other employees?
For the sake of simplicity, we are assuming that there is no other income to take into account when considering where the personal allowance will be offset.
On the face of it, there are three obvious options, i.e. a salary equal to:
– the secondary threshold, £9,100
– the annual directors’ threshold, £11,908
– the personal allowance, £12,570.
In previous years, choosing the secondary threshold has been the best option, with any remaining required profits extracted as dividends. Will this still be the case following the increased primary threshold?
Because of the way the personal allowance, dividend allowance and increased NI thresholds work, the optimum position for a single person company will, in most cases, be to take a salary equal to the composite primary threshold of £11,908.
Of course, running a single-person company may not be tax efficient once the increase in corporation tax kicks in from April 2023. You should review the possibility of bringing in a second person, e.g. a spouse as a second director shareholder, as part of a wider planning exercise in the months ahead. This may in turn affect the profit extraction strategy for 2022/23.
The position for companies where the employment allowance is available is unchanged. However, for single person companies, the optimum salary for profit extraction will typically be £11,908 rather than the secondary NI threshold. If you are changing ownership structure in 2022/23, ensure you revisit your position accordingly.