Unlike income tax where you’re only allowed one tax-free allowance, NI gives you one allowance for each job you hold. Naturally, there are conditions, so when can you take advantage of this NI break?
Vive la difference!
One of the government’s big plans is to merge income tax and NI. However, for the foreseeable future there are significant differences. For example, income tax is worked out by reference to your total income whereas NI is usually calculated on a job-by-job basis. But where businesses are associated, different rules apply.
Is there an association?
Even though being associated for tax purposes these days doesn’t carry the same significance as it used to, tax legislation rules define what associated means. However, there’s no equivalent definition for NI purposes; instead HMRC relies on the everyday meaning. This allows it to cast a very wide net in which employers can be caught. The consequence is that earnings paid by those employers must be lumped together for NI purposes.
Example. Jenny is a director of Acom Ltd and Bcom Ltd. Both operate from the same premises and share employees. In 2020/21 she draws salary of £8,000 per year from each. The rest of her income is paid as dividends (which are, of course, not subject to NI). Because her earnings are less the NI earnings thresholds, neither employers’ nor employees’ NI is payable. If HMRC rules that Acom and Bcom are associated, NI must be worked out on the aggregate of Jenny’s salaries. This would result in employers’ and employees’ contributions of around £1,000 and £650 respectively.
Note. Associated employers are permitted to decide which of them accounts for the NI, or they could share the liability in proportion to the salary they pay. Either way this will require making adjustments to the payroll of one or all employers. You’ll need to consult your software guide on how to achieve this.
Tip. It’s up to HMRC to make its case for aggregation of earnings. You aren’t required to do its job, but you cannot deliberately split earnings between employers for the purpose of avoiding NI.
Tackling HMRC over aggregation
If HMRC says that because you’re a director shareholder of two or more companies they are associated, refer it to the guidance in its NI manual (NIM10010). This says “just because two companies associate together for mutual aid, or that one or more directors are common to each, does not, of itself, cause those companies to be carrying on business in association with each other.”
Association for NI purposes depends on the companies’ financial dependance on each other. This doesn’t mean simply who pays the bills, but rather that each company’s success or failure is largely reliant on the other’s. The more independent their prospects are, the less likely they are to be associated.
Tip. If you’re a director of two or more companies which aren’t associated, consider dividing your salary between them to maximise NI efficiency. For example, for 2020/21 you could take salaries of up to £8,788 from each of three companies without triggering any employers’ NI and £9,500 before employees’ NI applies.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.