Director national insurance & AEP
I have a nasty suspicion I already know the answer to this question but hopefully someone might be able to point me in an alternative direction.
A colleague and I are co-directors of a start-up and have been since inception in Nov-10. The Company has only been in a position to pay salaries to our one employee and the two directors since Jul-11 i.e. from month 4 of this tax year. Prior to this, we were all working for free.
From July 11 to date, we have all been paid regular monthly salaries and basing the PAYE and NI contributions on the outputs from the HMRC Basic PAYE Tools software. Within the software, we have set the two directors to pay NIC's as if they were employees (we had originally believed this to be the most prudent approach). Having now prepared the last payroll run for this tax year (31 Mar 12), I see that the directors are now required to pay additional national insurance contributions as we are being assessed for national insurance based upon annual earnings (under the AEP) rather than month by month earnings as a normal employee would be. i.e. we are effectively expected to pay NI for the 3 months at the beginning of this tax year when we couldn't take salaries.
Is this assessment correct as it means the directors will be paying NI for the 3 months when they were unpaid and working for free whereas our employee only pays NI for the months that they were being paid salary? Is this a fault of the software not allowing for unpaid months or should I have set the software to show that we were only became directors from Jul-11 (i.e. when we starting getting paid) and therefore the NI would pro-rate and we would be treated no differently to an employee?
I know this is rather involved but I hope somebody can help as I'm waiting for a call back from HMRC but given how busy their call centre is, I'm not holding my breath.
Thanks in advance!