National insurance credits – Do I need a salary?

Ok, here we go again with another common question we say from business owners and directors that have their own limited company. Should I pay myself a salary so that I contribute towards to get national insurance credits? Or do I need a salary to get NI credits, to qualify for my ‘stamp’ (now we are getting old school!), can I save tax paying myself a salary and so on…

There are two main reasons why you should pay yourself a salary through your own limited company.;

• To take advantage of the tax-free personal allowance
• To qualify for national insurance credits

Let me tackle one aspect at a time

Using your tax-free personal allowance

Most people are aware that they can earn a certain amount of money completely tax-free. This ‘allowance’ changes most years with the government allowing you slightly more to account for inflation etc. The current amount is £12,500 for the tax year ending 5th April 2020. Last year it was £11,850 and going back several years ago was far lower still. If you have a limited company then to benefit from this allowance you need to pay yourself a salary (or wage) generally up to this amount. You should set up a PAYE scheme with HMRC to do so officially and make submissions via RTI (Real Time Information). The reason why I said ‘up to this amount’ is purely from a tax efficiency perspective.

There is a rather strange system in place where if you ‘pay yourself’ as a salary between £6,136 (the LEL / Lower Earnings Limit) and £8,632 (the PT / Primary Threshold) for 19/20 then you qualify in full for national insurance entitlements and credits but don’t physically have to pay a penny! Many of our clients find this weird and I guess it is! Some like the idea of paying themselves a bit more so that they physically have to pay national insurance. However, it makes no difference!

Qualifying for national insurance credits

Ok, so I think I have pretty much spoilt the ending for you already in the last section regarding your national insurance credits. To get NI credits you need to pay yourself a salary of over £6,136 (the LEL). If you pay yourself anything over £8,632 (the PT / Primary Threshold) then you will need to pay HMRC 12.8% of this additional salary and it gets you nothing in return.

Summary

In a nutshell, these are the two main reasons why you would typically pay yourself a salary via your own limited company. However, this article is not designed to be conclusive and cover your individual circumstances in full. There can be other factors to consider.

In a future post, I will be talking about other ways to pay yourself such as a dividend.