Many social entrepreneurs who run Community Interest Companies, Charities or other forms of Not-For-Profit organisations are confused by the National Insurance (NI) rules.
Social entrepreneurs miss out of savings and pay more NI than they need to.
The Salary or Invoice Question for Social Entrepreneurs?
Social entrepreneurs often ask if they need to pay themselves a salary for the work they do in their social enterprise?
If they need to invoice their social enterprise from their sole trade business?
They approach this as an either/or problem (“Should I be salaried or should I invoice”).
The correct answer is “BOTH”.
Does this apply to everyone?
This advice should only be applied to match the economic reality of your circumstances. It should not be used just to save NI.
NI applies differently to Employments and Trades
There are two main types of NI:
- Class 1 – applied to employment earnings (from a payroll); and
- Class 2 and 4 applied to trading profits (from a sole trade).
These work as follows:
NI on Employment (Class 1)
People in employment are paid a wage (or salary). This wage receives a NI threshold allowance of £12,570 before NI of 13.25% is applied (allowance applicable from 5.7.2022).
NI on Self-Employment Trade (Class 2 and Class 4)
For sole traders NI works slightly differently. Firstly, a weekly rate of £3.15 (class 2) applies. Secondly, 10.25% applies to profits over £11,908 in the tax year (class 4).
How the saving works
Suppose you operate a trade and, also, run a social enterprise. In this case, the optimum situation is to pay yourself as salary from the social enterprise and to continue invoicing your other customers from your trade.
The salary you pay out of the social enterprise should be based on the hours’ worked (paid at a rate of at least the minimum wage). You might also set up a service agreement between the social enterprise and yourself to ensure appropriate paperwork is in place.
IN THIS EXAMPLE £624 IS SAVED BY APPLYING THESE RULES CORRECTLY
Harry’s Social Enterprise Example
Before the Social Enterprise
Harry is a gardener and has been running his business for years. He is expecting to make £30,000 in profits in 2022/23. He will pay £2,018 in NI.
This is worked out as follows: Class 2: 52 weeks at £3.15 = £164. Class 4: £30,000 less £11,908 x 10.25% = £1,854. Total NI = £164 + £1,854= £2,018.
Harry sets up a Social Enterprise
Harry has been working with young people, teaching them gardening. He forms a Community Interest Company (CIC) and raises grant funding of £10,000. He spends 15 hours per week setting up the social enterprise and teaching gardening skills (this is very different from his usual business activities in his gardening business).
Because he has less time in his gardening business, his profits reduce from £30,000 to £22,500. The difference of £7,500 is attributable to the hours he has been working in the CIC. Harry asks Triple Bottom Line Accounting (TBLA) for support. TBLA sets up a payroll scheme to pay him £7,500 as a salary.
Sole trade gardener: Class 2: 52 weeks at £3.15 = £164. Class 4: £22,500 less £11,908 x 10.25% = £1,086. Total NI = £164 + £1,086 = £1,250.
NI applicable to the employment: £7,500 is below the NI threshold, so there is no NI to arising on the CIC salary.
SAVING = £624.
Harry has saved £768 in NI (£2,018 – £1,250). TBLA charge £12 per month (including VAT) for running the payroll (£144 per annum), so the net saving for Harry is £624.
By utilising current tax legislation Harry has paid less NI and can use the extra money to help young people through the activities in his CIC.
The savings will change depending on the amount that is paid through salary and can lead to reductions of over £1,000.
Contact TBLA for a free 30-minute consultation.
To discuss the above or other financial matters.
Peter Ellington is the Founder of Triple Bottom Line Accounting. He has a Doctorate in Education and campaigns for social and environmental justice.