What does the Spring Statement 2022 mean for owner-managed businesses?

/ Posted By - Bradleys Accountants / Categories - Accounting news

Rishi Sunak tinkered with a few items in his most recent Spring Statement on March 23, 2022 — the major components being National Insurance (NI) and income tax.

Firstly, the primary Class 1 threshold has been increased to match the personal allowance but only with effect from July 2022 to allow payroll software providers to adjust their settings for the July RTI submission.

This means that employees will have to start paying NI only when their monthly gross pay exceeds £1,047.50. Employers, however, will have to pay NI, a secondary liability to Class 1 National Insurance Contribution (NIC), on any amounts over £175 per week (Approx. £757 per month), which was previously £170 per week in 2021/22.

Sadly, he has used this opportunity to increase Class 1 (primary and secondary) and Class 4 (tax of self-employed earnings) national insurance rates by 1.25%.

To help cushion the blow to businesses with employees, the employer’s allowance has increased by £1,000 to £5,000 for 2022/23. This means an employer will receive a credit of up to £5,000 off their annual national insurance costs.

This means the employer would not incur any NI cost on two staff members (one at £20,000 and another at £30,000) or three staff members on £20,000 per annum. In respect of income tax, unfortunately for OMBs and investors, the dividend tax rate has increased by 1.25%, mimicking the national insurance uplift.

To illustrate how company employees and sole traders will be affected, I have shown the comparative gain or loss against the prior year (2021/22) below:

Annual income

Employment
Gain/(loss) against PY

Self Employed
Gain/ (Loss) against PY

10,000

£51.84

£33.68

20,000

£267.37

£172.10

30,000

£142.37

£47.10

40,000

£17.37

-£77.90

50,000

-£107.64

-£202.90

What is the optimal salary/dividend structure for a small limited company now?

1. Scenario one – Single Director

In this example, I have assumed the director is not retired. The salary and dividends from a single limited company are his sole income, assuming the directors take £50270 per annum in a mixture of dividends and salary:

Primary Threshold

Secondary Threshold

3 Months (<£190pw/<£175pw)

£2,469

£2,274

9 months (<£242pw/<£175pw)

£9,428

£6,824

Annual Salary

£11,897

£9,098

In the above table, I have looked at what the annual gross pay would be for the director if they were to pay themselves on the primary threshold allowance and at the secondary threshold.

Corporation tax Saving

£2.260.33

£ 1728.62

£531.71

Employer cost

£421.17

£0

£-421.17

£110.54

Based on the primary threshold salary, the owner would gain a net gain of £110.54. His corporation tax would be reduced by £531.71, but he will have an additional employers’ NI to pay on the increased salary.

2. Scenario two – Two Directors

As there is more than one employee, they will be entitled to claim the employer’s allowance, which means that they will be £1,063.44 (2 x £531.71) better off overall due to the reduced corporation tax.

Rishi has also coincidentally reduced the income tax rate to 19% by 2024, just in time for the election year, which is the first time the income tax rate has been reduced since 2007. 

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