The Chancellor wants to merge tax and NI, but that won’t happen soon. This is good news because it means you can still use the “earnings period” loophole to cut your employees’ NI bill. How does this work?
Although the PAYE system collects both tax and NI from wages and salaries, there are two separate sets of rules and calculations for these. Tax is calculated using allowances and rate bands for a full year, while NI is usually worked out applying weekly or monthly limits. You can legitimately exploit this rule to your advantage.
NI for directors is worked out using annual NI limits, so the loophole doesn’t exist here. But as a director you can benefit indirectly. Reducing NI costs for your employees means they’ll have more in their pocket which is something you can take into account when reviewing salary levels.
Not just for the higher paid
Where your employees earn up to the upper earnings limit (UEL), currently £817 per week (£3,540 per month), they’ll pay 12% NI. But on earnings above this they’ll pay only 2%. The UEL is fairly high and so you might think that it’s only your top paid workers who’ll benefit from the lower rate. This isn’t always the case. Where your employees earn below the UEL but receive irregular payments, e.g. bonuses, these can push their pay over the limit meaning the reduced rate of NI will apply.
Acom printers Ltd employs several shop floor workers. Their basic pay is £550 per week, but they receive a bonus twice a year if the company meets performance targets. In the first week of November each employee receives a gross bonus of £1,500. NI will be due on part of the bonus up to the UEL at 12% (£267) while the balance (£1,233) is above the UEL and NI is payable at 2%. So paying performance linked pay rather than regular earnings can save NI for lower paid workers. In our example, Acom’s employees each saved NI of £123 just on one bonus. The irregular bonus tactic can work well, but there are anti-avoidance rules.
Where you set your employees’ wages pattern just to benefit from the UEL loophole, by, say, paying them a low wage one week/month and a high one the next, the Taxman can order you to work out the NI differently so that no NI advantage is gained. The good news is that genuinely variable payments, such as bonuses, commissions etc. aren’t affected. What’s more, there are other legitimate ways to take advantage of the UEL.
The directors of Acom offer optional benefits to their employees. For example, by paying or reimbursing the cost of their annual rail season ticket or gym memberships, which they recover by making deductions from their pay over a period of time (see The next step). The rules say that paying an employee’s bill for them counts as normal salary for the week or month in which it’s paid. And where this boosts their salary over the UEL they’ll be saving NI.
Where you pay/reimburse more than one personal bill for an employee, lump these together in the same payroll period. This will increase their pay for NI purposes and potentially the amount which falls above the UEL. The greater the excess over the UEL, the more NI will be saved.
Irregular payments of earnings, such as commission, can mean part of your employees’ wages fall into the lower (2%) NI band. Paying annual bills for them, such as their rail season ticket, as a substitute for wages can increase the amount on which the lower NI applies and so increase their net pay.