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Directors pay adjustment from 1k to the magic 833.33

It's all a bit of a minefield for a non-accountant learning as they go - NIC payments, £2k NIC allowance, corp tax, income tax etc.

We recently got our first years books back from our accountants and she advised that paying £1k/mth wage to myself and business partner (as directors) was inefficient, I should pay £644. So I did some reading and found that in fact with NIC allowance and only two employees currently (both directors) it would be better to pay £833.33 or thereabouts.

The difficulty for me (doing payroll and understanding all this) is I've already paid the first 3 months wages of the year at £1k (I think we get about £916 of that, £40 ish NIC and the rest income tax) and now I'm not sure if I should make an adjustment for 1 month (lowering the wage) before going onto £833 so total annual salary is 10,000 or less (being aware of the £10/k personal allowance)?

Yesterday I paid £834.00 each, £20.52 each NIC (£813.48 cleared each) and no income tax using our PayRoo software. We're signed up for the £2k NIC employers allowance a while back, so I only ended up paying the HMRC £41.04 just for NIC for employee instead of something like £80 for us both NIC and another £60-80 for income tax (I forget how much). Quite a difference!

Next up, we want to employ next month, the salary would probably be ~£20k so I'm wondering how that will affect things, if at all (with regards to the NIC employers allowance)? I don't know how to do the sums but my gut tells me on my partner and my £10k each, another employee at £20k still probably wouldn't use up all the £2k allowance anyway? Especially as it'd only be 7 months of 2014/15 anyway, so even after employing it's probably best to stick to £834/month?

Note, I realise 12 x 834 is over 10k (just) but given I've already done 3 months @ £1k/mth, a few pounds here and there isn't a big deal. I'm not trying to be the perfect zero income tax payer, I'm trying to understand it all and trying to be tax efficient to save the business as much money as I can in it's early stages. Please help me understand this clearly and advice the best course of action for the next 8 months pay.

Thanks, I really appreciate expert input!

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For directors it is an annual not a monthly figure, if you are running your own payroll your might have not have appreciated all the nuances. 

One would hope your accountants should be sitting down and explaining all this to you, it should be basic stuff for them. 

Generally you would pay annual £7956 for 2014/15 tax year for a company director. 

Any higher and you break into the NI, which as above if you employ someone is a real issue as the £2k allowance only makes payment into the NI bracket tax neutral (ish) and its not normally worth the hassle of all the deductions and payments. 

I hope that helps.

Do of course appreciate I am not your accountant and know nothing about your specific circumstances and why salaries at this level are suggested. It may be you have no expectation of profit and no other mechanism other than loans to withdraw monies to live on.

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Basic PAYE guidance

I don't really agree with IReally, except that you really should discuss this with your accountants and preferably, ask them to run your payroll for you.

However, some basic PAYE guidance might help:

Directors have an annual earnings period for NIC, which means that neither they nor their company pay any NIC until their gross pay in 2014/15 to date exceeds £7,956.  Unwittingly, you appear to have opted for the alternative basis which is to treat directors as ordinary employees with a monthly earnings period, so that you have paid NIC when your monthly pay exceeds £663 a month.For directors who have no other employments or pensions, a salary of £10,000 in 2014/15 is the most tax efficient, because if you only take a salary of £7,956, you will be wasting £2,044 of your personal tax-free allowance.  For owner directors, there is also an overall saving as a result of paying the employee's NIC of £245.28 at 12% of the £2,004, because the company will save £408.80 of corporation tax at 20% on the additional £2,044 of expenditure.The employment allowance, which means that the company does not pay the first £2,000 of employer's NIC at 13.8%, will only be fully utilised if the company's gross payroll is £14,493 more than the total of £7,956 for each employee.  This would mean salaries of £15,202 each for the two directors, but another employee earning £20,000, even if only for 7 months, will use up a lot of the EA on his own.For owner directors with no other employments or pensions, a salary in excess of £10,000 is less efficient in terms of NIC (not tax) than taking dividends (assuming that the company has sufficient retained profits to cover the dividends) because the employee would continue to pay employee's NIC at 12% while dividends are NIC-free.

If you think that you might not understand all the ramifications, I can only repeat that you should talk to your accountant.  On the other hand, I cannot see why she would recommend a salary of £644 a month.

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@Euan, my view was the £160 or so a head wasn't worth running a "proper" monthly payroll for, but quite agree there is a saving of going to the full £10k if there are no other earnings and you are running a small payroll anyway with some NIC allowance remaining. It is all however quite marginal.

 

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Yes, but ...

ireallyshouldknowthisbut wrote:

@Euan, my view was the £160 or so a head wasn't worth running a "proper" monthly payroll for, but quite agree there is a saving of going to the full £10k if there are no other earnings and you are running a small payroll anyway with some NIC allowance remaining. It is all however quite marginal.

... they are already paying NIC, so they have already incurred the hassle of paying over PAYE.  I agree that it is all fairly marginal, but the OP seems very keen on maximising the tax efficiency.

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more

Many thanks for your answers, I'm trying to wrap my head around it all.

Yes, I want to be tax efficient but as I said, I'm not looking to pay zero specifically or win at the game of paying no tax (!!) - more just knowing why to do things, what is fairly efficient (£100 ish 'over-paid' is no biggy in the scheme of things, as long as I'm learning for future years). It's really about improving the business as a whole, it';s a small business and I want it to survive and grow.

Our accountants are a bit pricey which is why I do PayRoll myself using PayRoo software. They only do our corp tax return and dividend paperwork (£1200+vat) so asking for PayRoll advice is tricky as they'll want to do it themselves and charge, their min charge is based on 5 employees so for a 2 employee company it doesn't make sense to give that to them just yet.

So, I've paid:
End of-

Apr £2k (£1k each) @ 926.56 x 2 pay and £239.90 NIC and Tax (not signed up for employers NIC allowance)May £2k @ 926.36 x 2 pay and £147.28 NIC and Tax (now signed up for NIC allowance)Jun £2k - exact same as MayJul £1,668 @ £834 x 2 pay and £41.04 NIC (no tax)

So I'm now trying to figure out the most headache free whilst still fairly efficient way to continue each month. I've already paid the tax and NIC montly on Apr, May and Jun so should I just write these off in my mind as done and dusted and just pay £834 monthly?

I understand employing someone on a standard salary will shake things up, but perhaps until we actually employ I shouldn't take this into consideration.

This is are only income, yes, there isn't really anything else to take into consideration - we run a very simple company. Thanks again, it's really appreciated and I'll try to read up more too.

 

 

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