Director of limited company taking on a second job - what to do about tax code

If she does not give the new employer a P45 she will be taxed BR

Just thinking outloud but could she complete a P46 for the new job stating that it is now her main employment.

The Revenue would then reallocate the personal allowance to the new job and issue BR codes for her company. Both should be month 1 codes.

This will remove the need to remove her from company payroll and then add her back at a later date.

I am a bit concerned about some of the facts given.  To keep her salary within the personal allowance, she could have been paid up to £6,475 a year, not just "around £5,000".  The justification for paying a salary of at least £5,044 (which I trust is what you mean by around £5,000) is that is the NI Lower Earnings Limit above which she will be credited with free NI contributions (up to a salary of £5,715 at which threshold NI contributions become payable) in order to maintain her entitlement to state benefits, particularly the state pension.

If she goes to another employer without a P45, the new employer should give her a P46 on which she will have to admit that she has another job and will therefore be taxed at the basic rate of 20% as Chris says.

[EDIT after seeing Valentino's response]  Why would the Revenue issue a PAYE code to her company if she has completed a P46 for her new employer stating that it is her only job?  It is no longer an option on the P46 to state that the new job is her main job.  Also, 9 months will take her into the 2011/12 tax year and her PAYE records will have to be set up again anyhow.

Agreed if she says it is a second job they will tax at BR until further notice from the Revenue.

A quick call to the Revenue (if it is still possible to do such a thing) would get the allowances reallocated to the new job. 

Of course my idea may not be any quicker than doing the P45's.

As a director your client will be subject to NI on a cumulative basis through her company. If her salary is reduced then she will not have sufficient salary to get the NI credit on an annual basis. It is worth bearing in mind that a P45 would not really be correct, even if HMRC suggest that it is, given that as she remains a director she will still be an officer/employee of the company for NI purposes at least.

I agree that a P45 isn't appropriate in this case.

I don't pay a director a minimum salary if they have another employment in the tax year - assuming the NI is sufficient.

Unless cash flow is really tight I would be happy to get the tax repaid at the end of the tax year.

If I was the director and I knew I wasn't going to be get paid from my own limited company I would sign any P46 as if I didn't have another job. Personally, I am a director of a dormant limited company. If I got a job should I say that I had another job on a P46?

Unless a contract of employment exists with the direcotors own company they are not an employee - they are an office holder and also a shareholder.

It is perfectly reasonable and possible to issue a P45 for a director of the company, on the basis that they will be working elsewhere for a period without that affecting their 'holding office' as a director. This would be the cleanest way of doing things. When the period of employment elsewhere is finished, the director would simply obtain a P45 from the other company and reinstate PAYE operations on their own company.

Whenever HMRC are given the oppertunity to issue multiple PAYE codings, they have made a hash of it. By issuing a P45 prior to commencement of employment elsewhere, this oppertunity is removed. Equally, if PAYE is temporarily suspended (through issuance of nil returns), this should make administration somewhat easier as well. The only shame is that a whole PAYE tax year couldn't be dealt with in this way.

Issue a P45 - It is the only way to achieve clarity.

I think a director is an employee - see this link http://www.paypershop.com/faq/employees.html

I can't see anything confirming it on the HMRC website though.

I'm happy to take a practical view of the situation in terms of PAYE administration.

A director is an 'Office Holder' - not an employee.

The only way this can change is by the director accepting a contract of service (hence employment) from the company. This requires the usual stages for the formation of any contract (offer and acceptance - i.e. ad idem, consideration and intention to be legally bound) and cannot exist without it.

Acceptance of the role of company director or secretary does not in an of itself constitue employment. This is why directors cannot be bound by rules surrounding National Minimum Wage or the Working Time Directive - again, unless they choose to be. Sorry to be brusk, but it is somewhat fundamental to the law of contract and UK employment statutes.

The confusion arises due to the fact that payments made to 'Office Holders' need to be subject to PAYE. However, if no payments are being made, this is not relevant and therefore a P45 can be issued for a director and it will have no effect on their acting fully on behalf of the company in whatever capacity is required. The only difference is they receive no remuneration for holding such office.

Part of the link says:

"In addition, the tax legislation requires some other persons to be treated as employees for PAYE purposes, i.e.

> office holders, such as directors and company secretaries"

Therefore, if the director continues to be a director then they continue to be an employee for PAYE purposes and no P45 should be issued. Whether payments are made or not are irrelevant.

As someone who has studied both contract and unemployment law, what you are saying is wrong in both law and fact.

It is perfectly reasonable to issue a P45 for a director - providing they are no longer paid by the company. This does not affect their status as a director. It simply means that PAYE is no longer required.

However, the threshold for NI contributions to count towards 1 year is not dependent upon a single employment, but all employments during the tax year. I assume that between the two employments she will have a taxable income of more than ₤97 per week and therefore above the lower earnings limit. In which case 2010/2011 will be a qualifying year for NI pension contributions.

That seems to be the only thing that matters in this instance.

She will have 2010/2011 classed as a qualifying year provided she has earned more than 97 pounds per week and has paid Class 1 National Insurance contributions equivelent to 52 weeks. It does not matter that this is paid across two different employments or that in one of those employments she was a director. The only thing that matters is the number of paid weeks (52) and the class (1).

http://www.hmrc.gov.uk/ni/volcontr/toppingup.htm#2

If you need help call the National Insurance Enquiries for Individuals Helpline on Tel 0845 302 1479. Lines are open Monday to Friday from 8.00 am to 5.00 pm.

What is untrue?

Are you saying that the link I quoted is incorrect? I mean the bit where it says directors are treated as employees for PAYE purposes.

I understand that issuing a P45 to a director doesn’t affect their status as a director. I am simply quoting the link to show how it says that a director continues to be an employee – even if unpaid – during their directorship and therefore no P45 should be issued.

I am simply quoting the link to show how it says that a director continues to be an employee – even if unpaid – during their directorship and therefore no P45 should be issued.

I've been both factual and polite, but your interpretation is simply not correct. We all have our own specific areas of expertise and this is mine. Just accept it and move on.

"but your interpretation is simply not correct."

It's not my interpretation. I am simply quoting a link but I have not found anything as authoritative to counter it.

"We all have our own specific areas of expertise and this is mine."

So you say.

"Just accept it and move on."

I will not accept it. Do you have a reference to support your view?

"In addition, the tax legislation requires some other persons to be treated as employees for PAYE purposes, i.e.  office holders, such as directors and company secretaries"

The key point of the statement is "treated as employees for PAYE purposes".

The statement is not asserting they must be registered on PAYE regardless of whether they are being remunerated or not, just that they should be administered in the same way as an employee.

Therefore if the person in question is in effect ceasing the paid employment with the company, then I don't see a reason for not being able to issue a P45.

The whole point of the discussion is whether a director (whether paid or not) is an employee. If a director is an employee then as long as they are a director they are an employee and therefore no P45 should be issued when they stop being paid because they are still an employee.

“Your initial link stated that a director was an employee for payroll purposes, i.e. if they are receiving a salary.”

The link said: "In addition, the tax legislation requires some other persons to be treated as employees for PAYE purposes, i.e.

> office holders, such as directors and company secretaries"

This is for “PAYE purposes” not “payroll purposes”.  I don’t accept that they have to be receiving a salary. I am saying that it makes sense that a director is an employee whether being paid or not and as long as they remain a director a P45 should not be issued. I know many people say that a director is only an employee if they receive a salary for work done and I respect that view. I was only drawing attention to the link which clearly indicates that the people publishing the website think a director is always treated as an employee for PAYE - not I don't say that they are an employee for either payroll purposes or employment purposes.

Employment law doesn’t override tax rules or vice versa.

I have client who has people who work for them intermittently. Should I issue a P45 once they don’t work for a week or two? Are they still employees while they are not working even though they may do more work a fortnight later or a month later?

I can find you a website that insists Obama is not an American citizen and is part of a worldwide Muslim conspiracy; it does not make it true.

Tax in this country is set out in the legislation passed by parliament and interpreted fairly accurately most of the time by HMRC in their published manuals.

If a director receives emoluments from a company they should be taxed in the same manner that an employee would be, whether or not they are an employee.

by issuing the p45 from directors own company - HMRC may very well realise that, that ends the payroll - and auto deregister.   is this likely ?  

as you know the director will avail themelves of their own payroll in the future ie +9mths  - but  HMRC  only sees a p45 against the one + only employee 

so do you need to get into the realms of re registering or heaven forbid writing to reactivate/revers  an HMRC error.  No you do not.  So do not issue  p45.  Do not go there

a p46 covers the new role.  NI is covered for the benefits issue - certainly the new role will i am sure be at a greater rate anyway. Just make sure you do not run consurrent payroll - ERS NI doubly paid....... 

 the issue comes in the next tax year - p45 from employer surely cannot be used back in own company - which already has been issued with notices of coding.  Next tax year is the one to look at+ pre plan -  not this

I wasn't quoting a random website. It was a specific website relating to a search.

I didn't make out that if anything was said on a website it must be true. Maybe you think I did. If so, I would be happy for you to indicate what made you think that.

The problem was relating to one that crops up a lot and I have not seen an authoritative answer on HMRCs website. This is why I quote a website that seemed sensible even if there was no authority involved.

I don't think the issue is a matter of how the director should be taxed. In fact I'm sure you will know that directors can be treated differently for NIC purposes. The issue was whether a director should be issued with a P45 even though they remain a director. I'm not so sure it is clear cut given that if a P35 has to be submitted then many people think the directors should be included even if they don't receive any remuneration.

“auto deregister”? Given the problems HMRC seem to have with closing a payroll, I very much doubt that would be a problem.

I agree that, for all practical purposes, it is best to not issue a P45 and would advise that the completion of a P46 is sufficient. Any under/over payment of tax can be dealt with at the year end(s). Obviously, if cash flow is a problem then contacting HMRC to get a different tax code could solve the problem.

Please clarify which Present Circumstances box you suggest that the director should put on the P46 for the other employer :

B.  This is now my only job, in which case she would be taxed on a PAYE code of 647L M1, or

C.  I have another job, in which case she would be taxed on code BR.

B

Please do not confuse directors duties with employment.

No I do not think HMRC will auto deregister,

Chris

You keep thinking there's no difference between a director and an employee when it comes to payroll. The reason I am saying that a director shouldn't be issued with a P45 as long as he is a director is precisely because they are not the same as other employees. You can't think of what happens with employees and treat directors exactly the same.

I'm not certain what is the correct treatment but HMRC website doesn't give any clues.

 ... and the director was not going to receive any taxable earnings from their own company whilst they worked at the other company, then I'd issue a P45.

Two reasons for this:

1. It seems to be the simplest way (i.e. the least amount of admin for all involved) in order for them to receive the benefit of their tax allowance whilst working at the other company
2. The guidance in CWG2 page 6, which says;
   Who is an ‘employee’ for the purposes of PAYE and Class 1 NICs?
   In this guide, ‘employee’ means anyone who is gainfully employed in the UK and is:[..]
   an office holder with earnings chargeable to tax. An office holder is someone appointed to hold a titled office (including an elective office), for example, a company director...

So on the basis that they no longer have any 'earnings chargeable to tax' from their directorship, I'd keep it simple and issue a P45. And if anyone queried it I'd direct them to CWG2 page 6.

Peter, what can I say?

Not everything you read on the web is true.

David

That's all you can say? It's simply stating the obvious. I'm not sure why you feel the need to keep saying it.

To get back to saying something useful, my point is that if a director is considered an employee then as long as the director remains a director then a P45 should not be issued.

I assume you are saying, besides that not everything on the web is true, that a director is only an employee if he's being paid. Is my assumption correct?

I consider what I have said here an attempt to progress the debate. 

That's all you can say? It's simply stating the obvious.

Sometimes the obvious can be overlooked.

I'm not sure why you feel the need to keep saying it.

That was my first contribution to the debate and no-one else had previously made a reference to CWG2 - so I'm not sure what you are getting at.

To get back to saying something useful, my point is that if a director is considered an employee then as long as the director remains a director then a P45 should not be issued.

Even though CWG2 specifically states that they are only an employee if they are "an office holder with earnings chargeable to tax"? My suggestion is simple, practical and in line with HMRC guidance.

If it was me managing that payroll, then I wouldn't bother looking for a more complicated solution when the simple one ticks all the boxes...

Link

I referred to David but I mean Chris.

Back to the issue. David says: "Even though CWG2 specifically states that they are only an employee if they are "an office holder with earnings chargeable to tax"?" This would imply that once the earnings stopped they would cease to be an employee.

My reason for wanting to consider an alternative view was because there was a question a while back in which a lot of people said that every limited company should have a payroll scheme because directors were automatically employees.

I couldn't find any information on this issue on the HMRC website but David has provided a reference to the CWG2.

Chris

What did I say about repeating yourself?

Can I also add that threads of accounting web are not reliable guidance and the good ones provide pointers to source docs.

I understand that too.

HMRCs website is not always reliable because it can be out of date.

Some advice on AccountingWeb isn't that which can refer to a source document.

In this thread it would appear that only David provided a link to a source document that helped with the P45 issue.

Like many of us I spend time each year trying to close record this for disolved Limted Companies.  Just received a P35 penalty for 2005 for such a company so have no fear HMRC will not close it.  In any case there may be P11d benefits...

Use the existing company to bill for the directors time - I know there are IR35 implications but it is one further option to explore?

I have stopped paying myself from my limited company, but left the "employment" and PAYE system in place.  The Revenue (shock horror!) were very obliging in transferring my personal allowance from my own company to my new employer, once I'd explained that my earnings from my own company would be zero.   I got a random split in my new coding notice for 2010/11, but changed it back with one easy phonecall.  They didn't tell me to issue a P45 or to sack myself.

Just to cloud the waters a bit... I no longer have any (other) employees in my own company, so asked my insurance company to delete the Employer's Liability cover (to save money) - they said I am still an employee (as Managing Director) and therefore still need EL!!!  Doh!

This is not really a valid argument. You need to present appropriately referenced facts and logic if you want to convince someone you are right. This should not be difficult to do in your own area of expertise.

At present your client will pay 20% basic rate on the second salary as opposed to 21% CT on amounts she takes as a dividend.

It would only be approx £40 for 9 months but she would be better off having the two jobs and paying her tax as she earns it rather than having a larger CT bill at a time where she only has one income.

This is assuming your client's company will earn enough to obtain full relief on the second salary and that the dividends are not paid out of prior year's profits.