Company owners fret about saving tax when they should probably pay more attention to national insurance (NI), says Tax Tips & Advice. One mistake people make when setting up a firm is to pay for business expenses from their salary, assuming – correctly – that they can claim a corresponding corporation tax deduction and an income tax deduction for the expenses via their tax return. But “there’s no means for the directors/employees of a company to claim a deduction for business expenses once NI has been collected from salary payment”. The cost “can be horrendous”.
Say two directors incur expenses of £2,000 a month, which they meet out of their salary. The employers’ NI on £2,000 is £276 (13.8%). As the directors’ pay exceeds the NI upper limit, they lose £40 (2%). This amounts to an “irrecoverable NI cost” of £632. In a year, that’s more than £7,500. To avoid this, the directors should submit an expenses claim to the company and the company should reimburse that exact amount. Even better, the company can pay directly for any expenses.