New Company & Director's Salary

New Company & Director's Salary

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Hello all,

I set up a new limited company in October 2011 and would like to pay a small salary and dividends for the tax year to 5 April 2012. The company's year end is 31 October 2012.

I understand that directors' NIC's are calculated on an annual earnings basis if the director is appointed during the year.  Am I correct in saying that I must pro-rata the secondary threshold from £7,072 to £3,400 if no NIC's liability is to arise? Providing a salary of £7,072 appears to create an NIC liability of around £1,000.

If there is no other income for the period 6 April 2011 to 5 April 2012 (i.e. before the company was set up) can I pay a salary of £7,072 and include the same amount on the personal tax return for 2011-12? Or is the differene between £7,072 & £3,400 effectively lost for the year insofar as NIC's go due to the pro-rata rules?

The option seems to be: pay a salary of £7,072 and incur an NIC's liability of around £1,000; or pay £3,400 and pay additional corporation tax of £734 (£7072 - £3400 x 20%).

Many thanks in advance of your responses.

John

Replies (2)

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By GR
05th Mar 2012 19:29

I'm no payroll expert but........

 

If the company's accounting period is  XY October 2011 - 31 October 2012 I think you could:

 

Process payroll on a monthly basis for October 2011 - March 2012 at £588/month x 6 = £3,528.

 

£3,528 would go on P60 and SA100 for 2011/2012.

 

Process payroll on a monthly basis during April 2012 - October 2012 at £623 x 6 = £3,738

 

£7,266 (i.e. 3,528 + 3,738) would be charged to the director's renumeration in the accounts ending 31/10/2012.

 

And assuming you're putting through £588/month for 2011/12 and £623/month for 2012/13 there should be no NIC payable.

 

I would check the info, above, with someone else before you actually do it.

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By petergrove
05th Mar 2012 20:56

Hi John. Yes you would need to pro rate the salary down if you are a company director. The allowance is reduced according to the number of weeks between the date of incorporation and the end of the tax year. Page 44 of HMRC's booklet CA44 shows how this calculation is made.

All is not lost however. If your trade (as well as the company) is new and your location is in a qualifying area you may qualify for the Regional Employer National Insurance Contributions (NICs) Holiday for New Businesses  scheme. You would not be able to reclaim your employee's NI (12%) but you would be able to rclaim all of the employer's NI on your salary for your first 12 months of employment. This would give you an effective tax rate of 12% which is better than the 20% tax rate of paying yourself via a dividend.

 

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