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Two directors have been meeting the cost of business expenses out of their salary but theyve now found out that this could be costing them thousands a year in extra NI. Why is this and what's the alternative?
NI is More Costly
We think it would surprise most people to learn that usually the NI small to medium-sized companies pay HRMC outweighs the amount of tax payable under the PAYE system. Yet almost invariably its saving tax and not NI which gets company owners and tax experts hot under the collar. Its our view that more attention should be focused on NI.
Salaried Expenses
We recently came across a case of two directors who had started a company from scratch. Like many fledging businessmen they had initially cobbled together advice from various internet sites, including HRMC's, to get the company up and running. As a consequence they had been paying for business expenses from their salary. As far as they were concerned they company was meeting the cost of their pay and so would be able to claim a corresponding Corporation Tax (CT) deduction, and they could claim an income tax deduction for the expenses through their self-assessment tax return.
No NI Relief
The directors were spot on as far as tax was concerned but they hadn't given a second thought to NI. Employers' and employees' NI contributions, at 13.8% and up to 12% respectivley, were being paid on their salary despite the fact that part of this was used to meet bona fide business expenses.
Trap: Unlike the tax system, theres no means for the directors, employees or a company to claim a deduction for business expenses once NI had been collected from a salary payment. The cost to the company and the directors can be horrendous:
Example: Acom Ltd has two directors who each incur travel and subsistence costs of around £2,000 per month, they meet these expenses out of their salary. The employers' NI on £2,000 is £276 (13.8%) and, as the directors' pay exceeds the NI upper limit, they lose £40 (2%). For each month the irrecoverable NI cost to Acom is £632. In just one year Acom would have paid in excess of £7,500 to the Taxman unnecessarily.
Tip 1: The NI charges would have been avoided in their entirety if Acom had only reimbursed the directors the actual expenses they incurred backed up by a corresponding expenses claim submitted to the company.
Tip 2: NI would also not have been payable on any expenses which Acom paid direct e.g. hotel bills. This also has the advantage of keeping paperwork to a minimim because the director would not need to keep reciepts or submit expenses claims for these amounts.
A Final word on Tax
Apart from the NI savings there can also be a tax advantage to dealing with business expenses in this way. some expenses, e.g. entertaining, don't qualify for a tax deduction. If met by a director out of salary, they could lose income tax relief of up to 50%. the loss to a companyu would be no more than the maximum CT rate of 26%.
NI is payable on salary even where it's used to meet your business expenses and, unlike tax, you can't get it refunded by making an expenses clain. Dodge this problem by getting your company to pay for business expenses direct, e.g. hotel bills, travel costs etc. or by reimbursing you if you initially paid them.
If you would like any more information or advice about national insurance, don't hesitate to conact us on 0191 386 4786
How can we help?
We are a proactive firm of accountants who can assist you in all your financial needs in a friendly, efficient and professional manner.
Building partnerships, listening to your needs, and implementing a solid financial strategy is the backbone of our practice.
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