There are many ‘cliff-edge’ thresholds in the UK tax system – particularly where families and children are concerned. For example, if you have children and receive child benefit, then if either you or your partner (living with you, whether the parent of the children or not) earns over £60,000, then any child benefit starts to be clawed back. It’s clawed back gradually as the income of the higher earner in the household rises from £60,000 to £80,000; if the higher earner has an income of £80,000, then the whole of the child benefit will be clawed back.
Having said that, at the other end of the spectrum, there are cases where you might need to earn more – rather than less – to qualify for state benefits.
In England, working parents of children aged nine months to four years can get thirty hours of free childcare per week under the Free Childcare for Working Parents (FCWP) scheme. To qualify, you need to earn £10,159 per annum; this might seem an odd figure, but it’s sixteen hours per week at minimum wage. Dividends, rental income and interest (all forms of ‘non-earned’ income) do not count towards this £10,159 figure – only salary and profits from self-employment (or partnerships) do.
Now, if you are the only employee on your company’s payroll, your company will not qualify for the employment allowance (EA), meaning that your company will have to pay NI on your £10,159 salary. The NI is calculated as 15% on your earnings in excess of the annual £5,000 threshold. So, your company will pay NI of 15% x (£10,159 – £5,000) = £773.85. This is a business expense for your company, so corporation tax relief will be obtained on it – reducing the true ‘after-tax cost by somewhere between 19% and 25% depending on your company’s tax rate. The NI payable is, I’m sure you’ll agree, a small price to pay for thirty hours per week of free childcare!
If you live with your partner (whether married or not), your partner too must hit this £10,159 earnings threshold for you, as a couple, to qualify for FCWP. If your partner doesn’t meet this requirement (because they aren’t working or earning self-employed or partnership income), your company can employ them – paying them at least £10,159. You’ll just need to make sure that they have a genuine role in the company, wither that’s a frontline role or a back-office position chasing unpaid invoices or doing some administrative tasks.
The irony here is that, by employing your partner, your company will then qualify for the EA, meaning that there will be no NI for the company to pay on either your salary or your partner’s. So, it’s a win-win!
Now, most of you will know that eba generally recommends a salary of £12,570 (equal to the personal allowance) – so, on that basis, you’re already clearing the £10,159 minimum needed to qualify for FCWP.
Example
Steve is a consultant operating through a limited company in which he is the shareholder. He is the sole director and employee. He takes a salary of £12,570 per annum. As a result of there being only one employee, the company is not entitled to the EA, so has to pay employer’s NI of 15% x (£12,570 – £5,000) = £1,135.50 each year.
Steve’s partner, Steph, does not work and they have a one-year-old child. They do not qualify for FCWP because of Steph’s lack of income.
Steve offers Steph a part-time role in his company on a salary of £12,570. As a couple, they now both earn more than £10,159 so qualify for thirty hours per week of free childcare.
In addition, as the company now has two employees, it becomes eligible for the EA – exempting up to £10,500 per annum of employer’s NI payments.
There is now no employer’s NI for Steve’s company to pay on his salary – and none on Steph’s either, as the two lots of £1,135.50 (NI) are covered plentifully by the £10,500 EA exemption.
It’s a great result!
