Minimising NIC Through Remuneration Planning

The provision of benefits for employees will usually assist in reducing National Insurance Contributions for businesses. Where a director is concerned, this may have the opposite affect due to the low salary they receive. Here is an explanation on how remuneration planning can help to keep NIC’s low.

National Insurance Contributions

NIC is a form of tax and one that can be a large burden on the bank account. An NIC bill of a company will often exceed that of the owners income tax payable. The attention paid to it is therefore, equally as important as that to income tax planning. As a shareholding director of a company, if your tax-planning strategy is to draw a low salary and top it up with dividends, it might be time to change the plan slightly in favour of benefits in kind.


Paying Benefits In Kind

As an employer you have to pay Class 1A NI at 13.8% on the value of most benefits provided to employees and directors. While it’s the same rate at which Class 1 NI is payable on a salary, it is applied differently. Employees pay NIC on salary but not on benefits in kind.

Providing directors and employees with benefits instead of salary can reduce their NIC bill. An example of this is below.

Matt, a director, has a salary of £8,600, for 2019/20. This is slightly less than the lower earnings threshold (LET) at which NI becomes payable. In addition, Matt’s medical insurance premiums and health club fees which add up to £4,500 are paid by his employers. The benefits in kind will be subject to income tax however, there’s no NI for him to pay.

Taking a benefit in kind rather than a salary saves him a potential £540 (£4,500 x 12%).

It is important that any benefits in kind are arranged, bought and paid for by the company for the NI saving to be achieved. If the benefit is arranged by the employee/director and merely paid for by the company, NI would be payable as if the company had paid the amount as salary. 

Low salary and NI

Class 1A NI is payable on any benefit regardless of value, Class 1 NI is only payable on a salary, and benefits which count as salary when they surpasses the LET (£8,632 for 2019/20). This means that if, for whatever reason, you take a salary that’s less than the LET, or none at all, the logic of taking benefits instead of salary to save NI is turned on its head. Again using Matt as an example…

He usually draws income as dividends except for the £4,500 for the benefits in kind on which his company must pay Class 1A NIC of £621 (£4,500 x 13.8%). Matt pays no NIC. However, if Matt had been paid a salary there would be no NI at all because his earnings would be below the NI threshold.

It is also to be noted that, since 6 April 2017 anti-avoidance rules block tax and NI savings made from swapping salary for most types of benefit, but the rules don’t apply where the swap is the other way around.