Prepare for change: navigating upcoming payroll adjustments

National Minimum Wage and National Living Wage increase

In the latest Spring Budget update, it was announced that starting from 1 April 2024, both the National Living Wage (NLW) and the National Minimum Wage (NMW) will undergo a rate increase per hour. The NMW stands as the minimum hourly rate that nearly all employees are entitled to receive. Meanwhile, the NLW represents a mandatory minimum wage granted to employees aged 23 and above. 

However, a notable adjustment highlighted in the update is a lowered threshold for the NLW, extending its coverage to individuals aged 21 and above. This change brings about a significant cross over between the NLW and the NMW for those within the 21 and above age bracket.

Outlined below are the upcoming increases set to take effect from the beginning from 1 April.

Example on how to calculate the yearly and monthly salary calculation:  weekly contracted hours * National Min Wage *52 weeks in a year = yearly salary/12 months = monthly salary

An example of how this impacts employees over the age of 21:

40 hours per week new salary £23,795.20. per year/ £1,982.93 per month.

37.5 hours per week new salary £22,308 per year/ £1859 per month

Please note:  Salary sacrifice will further reduce the gross pay.

Director Salaries in regard to National Insurance Allowance

In the 2023 Autumn Statement, the chancellor announced a reduction in the main rate of Employees’ Class 1 National Insurance Contributions (NICs) from 12% to 10% which took effect from 6 January 2024. Subsequently, in the latest Spring Budget, it was stated that these rates would be further reduced to 8% taking effect from 6 April 2024. Additionally, the main rate of Class 4 NICs is also set to be lowered to 6%.

This reduction in NIC, combined with income tax requires that directors carefully review their remuneration strategies to minimise their tax liabilities.

We’ve outlined below two options for directors to consider, ensuring they don’t surpass the threshold where income tax and national insurance become payable:

Single Director with no employees (not eligible for Employer Allowance) *:

Option 1: Salary: £9,100 per annum. This option minimises PAYE tax, Employees’ and Employers’ NI while retaining the NI State Pension credit and saving 19% Corporation Tax.

Option 2: Salary: £12,570, whilst incurring Employer (ER) NI, will generally result in a larger corporation tax saving than the ER NI liability that would arise. You still have the choice of taking £9,100, where this would aid cashflow and leave more available to be taken as dividends. For example, the difference between £12,570 and £9,100 is £3,470, so an additional corporation tax saving of £659 for a company paying at the small profits rate of 19% vs Employer NI of £479.

Director with employees -where the employees are paid above the Secondary NI threshold (eligible for Employer Allowance)*:

Salary: £12,570 per annum, incurring Employer’s NI Liability of £479. Despite triggering an employer’s NI charge, this option maximises Corporation Tax savings, resulting in a net saving of £2,000 (corporation tax saving less employer’s NI) and you may be able to claim the Employment Allowance.

*  Calculated for a company with profits chargeable to corporation tax at the small profits rate. Savings would increase if profits were chargeable at the main rate.

How we can help you

If you would like to gain further insight into how these changes could impact you and your employees, please contact our Payroll Manager, Ioana Mateias, who can support you with these changes, ensuring you remain tax efficient and compliant with HMRC.

Email: [email protected]

Phone: 01926 422292