Understand how PAYE and NIC tax bands work for the 2021/22 tax year
Key Terms and Rates
PAYE (Pay As You Earn)
This is a tax that you pay on your salary – it is the main tax employees pay in the UK, (rates you pay are shown on the table below). PAYE is automatically deducted from your pay by your employer.
NIC (National Insurance Contributions)
Although there are important differences between how NIC and PAYE are calculated, NIC is essentially viewed these days as another form of tax. (When it was introduced in 1911 it was initially a contributory system of insurance against illness and unemployment).
Salary
Receiving a salary through your company is a tax efficient way of extracting funds from it.
Dividends
The other form of income you will receive from your company will be in the form of dividends.
Typical full time employee PAYE & NI rates
| PAYE tax rate | Employers NI tax rate | Employers NI tax rate | |||
|---|---|---|---|---|---|
| £0 to £37,700 | 20% | Up to £9,568 | 0% | Up to £8,840 | 0% |
| £37,701 to £150,000 | 40% | £9,568 to £50,270 | 12% | Anything more | 13.8% |
| Over £150,000 | 45% | Anything more | 2% | ||
*PAYE tax is deducted on earnings over £12,570 (the personal allowance).
Employers NI
The above table shows the level of NI that gets deducted from a typical full time employees pay. This is called Employees’ Primary Class 1 NI. There is also a NI charge on the employer, which is called Employers’ Secondary Class 1 NI.
So, not only does an employer deduct Employees’ Class 1 NIC and PAYE from a typical full time employee’s salary, they also need to pay Employers’ Class 1 NIC at a rate of 13.8% on annual earnings above £8,840.
For example, for an employee earning an annual salary of £30,000 per year:
Gross salary paid to employee => £30,000.00
Employers NIC (30,000 – £8,840) x 13.8% => £2,920.08
Total cost to employer => £32,920.08
Total rec’d by employee, £30,000 – £3,486 (PAYE) – £2,451.84 (NIC) => £24,062.16
Registration for PAYE and NIC
In order receive a salary through your company, it needs to be registered for PAYE with the tax office. We will do this for you unless you specifically don’t want us to.
The benefit of taking a salary through your company is that it is completely tax deductible for your company. The most tax effective salary you can draw is £8,832 (12 equal salary payments of £736 per month) – this is the highest salary you can take before a National Insurance charge arises.
Although the requirements of our clients vary, we have found that most benefit from receiving an annual salary through their company of £8,832.
Monthly RTI returns
Every company that is registered for PAYE needs to complete an RTI (Real Time Information) return each time a payroll payment is made to directors/employees. Effectively the return is a summary of the salary paid to each employee, and details of any PAYE and NI due. As part of our accounting service we complete these returns and file them on your behalf online with the tax office.
Paying PAYE and NIC
If you decide you want to receive a salary higher than £8,832 per year, then please just let us know – we can easily accommodate this. We will prepare the PAYE /NI calculations for you, and will then advise you at the end of each quarter how to make payment. The payment of PAYE and NI is due by the 22 July/Oct/Jan/Apr following the end of each quarter.
If you decide to keep your annual salary at £8,832 you will have no PAYE or NI payments to make.
Eligibility for the State Pension
We often get asked if an annual salary of £8,832 still qualifies as a contributing year towards the basic State Pension. The answer is yes. So long as you work in the UK, and earn a salary of more than £6,240, then the year qualifies. To receive the full basic State Pension, most people need to have built up 30 qualifying years. Often our clients think they need to pay NI to qualify for the basic pension, but this is not the case