Payroll

Setting the Salary Level

Should you choose to become a director of a limited company, you have the choice of paying yourself a combination of salary and dividends. This can provide a substantial saving for freelancers who would normally be liable for higher rate tax. Salary should be kept above the minimum wage level so it does not attract attention from HMRC.

We can advise you on the most appropriate salary level based upon your own unique circumstances

PAYE

PAYE is HMRC’s method of collecting income tax from the wages of employees as they earn it.

An employer has an obligation to deduct income tax and National Insurance Contributions (NICs) from its employee’s pay. PAYE should be deducted from any gross salaries paid from the company and remitted to HMRC including salary and wages, overtime, expense allowances, bonuses, commission, tips, statutory sick / holiday / maternity / paternity / adoption pay, lump sum payments and the cash value of any shares given to an employee.

The level of PAYE deducted from the salary depends on the individual’s circumstances and is determined by a coding notice which an employer receives on the employee’s behalf, after submission of a p45 or p46.

An employer must keep a record of all salary payments made to employees (with details of the deductions from the payments).

National Insurance Contributions (NIC)

NIC will also be payable on gross salary by the employee and the employer. The current NIC deductions are shown in the following table.

National Insurance contributions - rates and allowances

£ per week

2009-10

2010-11

2011-12

Lower earnings limit, primary Class 1

£95

£97

£102

Upper earnings limit, primary Class 1

£844

£844

£817

Upper accrual point

£770

£770

£770

Primary threshold

£110

£110

£139

Secondary threshold

£110

£110

£136

Employees’ primary Class 1 rate between primary threshold and upper earnings limit

11%

11%

12%

Employees’ primary Class 1 rate above upper earnings limit

1%

1%

2%

Class 1A rate on employer provided benefits (1)

12.8%

12.8%

13.8%

Employees’ contracted-out rebate

1.6%

1.6%

1.6%

Married women’s reduced rate between primary threshold and upper earnings limit

4.85%

4.85%

5.85%

Married women’s rate above upper earnings limit

1%

1%

2%

Employers’ secondary Class 1 rate above secondary threshold

12.8%

12.8%

13.8%

Employers’ contracted-out rebate, salary-related schemes

3.7%

3.7%

3.7%

Employers’ contracted-out rebate, money-purchase schemes

1.4%

1.4%

1.4%

Class 2 rate

£2.40

£2.40

£2.50

Class 2 small earnings exception

£5,075 per year

£5,075 per year

£5,315 per year

Special Class 2 rate for share fishermen

£3.05

£3.05

£3.15

Special Class 2 rate for volunteer development workers

£4.75

£4.85

£5.10

Class 3 rate

£12.05

£12.05

£12.60

Class 4 lower profits limit

£5, 715 per year

£5, 715 per year

£7,225 per year

Class 4 upper profits limit

£43, 875 per year

£43, 875 per year

£42,475 per year

Class 4 rate between lower profits limit and upper profits limit

8%

8%

9%

Class 4 rate above upper profits limit

1%

1%

2%

Additional primary Class 1 percentage rate on deferred employments

1%

1%

2%

Additional Class 4 percentage rate where deferment has been granted

1%

1%

2%

 

As a director of your company, the rules for deduction of NIC are slightly different from those of an employee in that the deductions will not begin until your gross salary reaches the lower earnings limit. At present this is £5,225.

Student Loans

Should you be in a position where you have student loan deductions from your salary, you will need to arrange for the payment of the deduction to HMRC. At present, the threshold for student loan deductions is set at £15,000, therefore should you choose to pay a level of salary lower than this through your company you are provided with an opportunity to delay or reduce the deductions you would normally be required to pay from your gross salary.

You can outsource your payroll to us and free yourself from the headache of dealing with this complicated and time consuming matter Prices