Since the upper limit was taken off employers’ National Insurance contributions in the 1980s, an industry has grown up around the avoidance of NIC. Much of this has been based on arrangements whereby people are paid in dividends, which do not attract NIC, rather than taking their income by way of salary. With employers’ NIC at 13.8 per cent, substantial savings have been made.
The changes made from 6 April 2016 which took away the tax credit on a dividend reduced the advantage of being paid by way of dividend. The new 25 per cent corporation tax rate that takes effect in two years’ time will largely eliminate the benefit. In fact, the commercial advantages of employment status for workers will mean that individuals who have operated through personal service companies may be keen to go on to the payroll.
If a business has £1,000 to reward a worker who is an employee on the payroll, the pay will only be £879 as there will be £121 of employers’ NIC to pay. After income tax at 40 per cent and NIC at 2 per cent on the £879, the employee will be left with £510. If that same worker operates through a company, the £1,000 received will fund a £750 dividend after paying the 25 per cent corporation tax. Higher rate tax on the dividend at 32.5 per cent will leave the worker with only £506 – marginally less than received as an employee.