Accounting Blog

Profit Extraction – 6th April 2012

Tax Planning – Maximum Profit Extraction

Increases in the National Insurance (NI) thresholds from 6th April 2012 will increase the optimum annual salary for Directors.

The Primary Threshold (PT), the point at which salaries become chargeable to NI for employees, will rise to from £7,228 to £7,592 per year and the Secondary Threshold (ST), the point at which salaries become chargeable to NI for employers, will rise from £7,072 to £7,488. However, the increase in the annual NI Lower Earnings Limit (LEL) is just under 5%, from £5,304 to £5,564.

Why is this differential important?

Assuming IR35 does not apply; directors can take salary between the LEL and the ST and take the rest of their income as dividends. This is a very tax-efficient arrangement as the salary is usually covered by your tax-free personal allowance – increased from 6th April 2012 to £8,105 – and there is no tax to pay on dividends until your total income exceeds £34,370. This effectively means that for a director there’s no tax to pay until their taxable income is more than £42,475 (£8,105 + £34,370).

Although taking salary above the LEL and below the ST means that no NI is payable, individuals still receive a credit as if you were earning £14,000 per year. This will help towards qualifying for your state pension. It should be noted that if you set your salary below the LEL you won’t receive a pension credit.

In summary, the increased earnings threshold from 6th April 2012 means you can take salary of up to £7,488 per year without you, or your company, paying NI.


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