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Tax Planning – Maximum Profit Extraction

Tax Planning – Maximum Profit Extraction

Increases in the National Insurance (NI) thresholds from 6th April 2013 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 £7,592 to £7,748 per year and the Secondary Threshold (ST), the point at which salaries become chargeable to NI for employers, will rise from £7,488 to £7,696. However, the increase in the annual NI Lower Earnings Limit (LEL) is just under 2%, from £5,564 to £5,668.

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 2013 to £9,440 – and there is no tax to pay on dividends until your total taxable income exceeds £32,010. This effectively means that for a director there’s no tax to pay until their taxable income is more than £41,450 (£9,440 + £32,010).

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 2013 means you can take salary of up to £7,696 per year without you, or your company, paying Income Tax or NI.

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