Holiday changes for Zero Hour Employees in April

In April 2024, significant changes to the holiday entitlement for zero hour and other irregular hours staff are set to take effect, altering the landscape of holiday pay and accrual for these workers. These changes, which amend the Working Time Regulations 1998, represent a departure from previous practices and aim to simplify the process for both employers and employees.

You first need to confirm that your zero hours employees fall within the definition of irregular hours or part year workers. Irregular hours are those workers whose paid hours set out in their contract vary in each pay period; a zero hours contract would meet this definition as there is no guarantee of hours to be given each week. Part-year workers are those who are contractually only required to work for part of the year and for the remainder neither work nor receive pay. For example, a term time worker who only gets paid whilst their working would meet this definition.

The second thing you need to confirm is when the holiday year runs from and to. The changes being brought in on 1 April 2024 will apply to all holiday years starting on or after that date. So, if you have a  holiday year that runs April to March, the changes will apply immediately. If however you have a different holiday year, such as a calendar year (January – December), then the changes won’t need to apply until January 2025.

What's New? 

The most notable change is the introduction of a new method for calculating holiday entitlement for part-year and irregular hours workers, which will be based on a percentage of the hours worked. Starting from April 1, 2024, holiday entitlement for these workers will accrue at a rate of 12.07% of the hours worked during the pay period. 

Additionally, employers will have the option to choose between two methods for paying holiday pay to these workers: 

1. Holiday Accrual: Holiday can be booked as usual and paid when it is taken. 
2. Holiday Pay: Alternatively, holiday pay can be rolled up with the normal pay, meaning an additional amount is included within every payslip to cover a worker’s holiday pay. 

This second option, known as "rolled-up" holiday pay, is a significant shift from the traditional method and is designed to simplify the process for employers who find it challenging to determine when a zero hour worker is actually on leave. 

A Fine Balance between Salary and Dividends

The tax code changes that have been announced by the UK government will have an impact on the way a company owner pays himself. One of the main changes is the increase of the corporation tax rate, which is the tax paid on company profits. The corporation tax rate will rise from 19% to a maximum of 25% from April 2023 for companies whose profits are above £50k. That means that company owners who pay themselves dividends will have less profits left in their company after having paid corporation tax. 

Another change is the reduction of the dividend allowance, which is the amount of dividend income that is tax-free. The dividend allowance will be cut from £2,000 to £1,000 from 6 April 2023 and then again to £500 from 6 April 2024. This means that company owners who pay themselves dividends above these thresholds will pay, again, more tax on their dividend income. 

If you add to that the fact that in contrast to salary, dividend rate increase was not overturned last year resulting in 1.25 percentage point across the board (8.75% for the basic rate, 33.75% for the higher rate and 39.35% for the additional rate) it's easy to understand why the tax situation has seriously worsen for the UK company owner. 

How Tax Code Changes Impact Company Owners 

One may wonder if these changes will affect the optimal split between salary and dividends for company owners who want to minimise their tax liability. Generally speaking, paying a low salary and high dividends has been a tax-efficient strategy for company owners, as dividends are not subject to National Insurance contributions and have lower tax rates than salary. However, with the increase of the corporation tax rate, the reduction of the dividend allowance and the increase of the dividend tax rates, this strategy may become less attractive. 

One thing is certain, the situation is now a lot more complex. In order to assess the optimum split between salary and dividends, one now needs to know the profit level of the company since it affects its corporation tax rate, the size of the payroll since it affects the availability of the employers allowance (the £5K NIC allowance), the overall level income of the company owner since it affects the availability of the personal allowance and many other factors. While in most situations it's still more tax efficient to take a salary of up to the personal allowance of £12,570 there are many cases where it's not necessarily true anymore. 

Because we now have effectively 3 different marginal corporation tax rates, let's look at the effective rates of taxation combining corporation tax, national insurance, and income tax in each different case. We assume that the dividend allowance has already been used. 

Optimal salary for a company director - 2018 update

It’s that time of year when we need to look at the level of salary that company directors should be paying themselves from 6th April.

As in previous years, the main question is whether to pay a salary up to the Personal Allowance level or whether to pay a salary to the level at which National Insurance kicks in. We would generally recommend the second option to reduce administration. TL;DR: if the director has no other income and the Employment Allowance will be used up against other staff salaries then the best option would be for the director to be paid a salary of £8,424 (£702 per month). This should be topped up with £37,926 of dividends.

If the director is owed money by the company however they could also charge interest on their loan account so this may be an additional consideration for some. In the following it is also assumed the director wishes to stay below the higher rate tax band threshold for personal income tax. It is also assumed that they have no student loan balance, are not caught by IR35 and have a full personal allowance. It is assumed they are UK resident and have no other income, capital gains and there is no relief from tax to claim such as gift aid or pension payments.

Dividend strategies for post April 2016

Prior to 6 April 2016, there was generally a tax advantage to extracting profits by way of dividends, often once a salary had been taken to utilise the personal allowance and ensure entitlement to certain state benefits. With the new dividend taxation regime from 6 April 2016, the tax advantage of dividends as opposed to salary / bonuses is reduced or in certain cases eliminated entirely. However, dividend planning is still important and is not as straightforward as it appears on the surface. Dividend planning strategies include cashflow and administrative ease as well as tax savings.

Many companies distribute dividends on a monthly basis as a means of providing themselves with a 'salary-like' income. In many cases it is only through habit and there is no reason that these frequent distributions shouldn't be replaced by a less frequent dividend followed by drawings against their current account with the company.

Optimum salary for directors: changes this year

This is one of the questions we hear most often: what is the optimum salary I should take as a director?

There are many salary calculators on the web that you can use but the easiest way in the past has been to take the maximum salary that does not attract taxes nor national insurance, neither for the employee nor for the employee (see our previous article). In 2013/2014 that amount was £7,696 pa. But in 2014/2015, due to the new £2,000 Employment Allowance, there is now a new option for directors' salaries:

1. If the company is able to use all the £2,000 Employment Allowance in the year, then the best route for the Director’s salary will be to pay over the LEL but below the secondary level in 2014/15 i.e. £7,956 pa (£663 per month). The rest will have to topped up by dividends as per in the previous years.

What is the optimum salary for a director?

It's common practice for directors of small businesses who are also the company owners to pay themselves a small salary and then take the rest of their income as dividends from the available profit. The reason is for tax efficiency. A company starts paying corporation tax from the first pound of profit and salaries being an expense, they reduce that profit. Dividends on the other hand are distributed after corporation tax of 20% (for small businesses) has been paid. The problem with salaries on the other hand is that they can be heavily taxed on the recipient and also they generate significant Class 1 National Insurance Contributions (12% for the employee and 13.8% for the employer). Thankfully Income Tax and NIC are only charged after you earn a certain amount per year.

From 6th April 2013 the rate at which you can pay a salary to an employee without suffering Income Tax and NIC will increase from £7,488 to £7,696 per annum. This is known as the Employers’ Earnings Threshold. If you have Limited Company and pay yourself a small salary then you should consider increasing the salary up to this threshold.