simplest PAYE
A company has been paying its sole employee / director / owner £482 pcm and accounting for PAYE through an agent (NICs and income tax). The director needs a monthly income of around £400, but wants to operate PAYE on the simplest basis. I wondered whether the director could draw on a loan account through the year, say £475 pcm and at the end of the year (say, March), pay a salary of £5,700 and operate PAYE on that, reversing the director's loan.
Then presumably the company could account for PAYE just on the one payment and its admin would be limited to this and to the end of year return. The £475 / £5,700 level would gain entitlement to contributory benefits but mean no NICs are payable. If the company made a surplus the director could consider declaring a dividend in addition.
I would welcome views / advice.
£472? £482?
Why would you recommend paying £472 a month when the NI Earnings Threshold - the point at which NIC become payable - is £476 a month? £475 is a nice round number, which is what we tend to suggest, but what's the logic for £472? However, the upper limit for paying salary with no NI deductions is not really relevant as the director only needs £400 a month, but he would need to pay himself at least £421, the Lower Earnings Limit in 2010/11, in order to qualify for state benefits.
Although the OP omitted to mention it, I guess that the problem is that the director has another job or perhaps, a pension, so he will have to be taxed (at least, initially) at the basic rate of 20%. If so, in order to produce net pay of £400, he will need gross pay of over £500 a month (so why is he being paid £482?), on which NIC will also be payable.
However, my basic answer to the question is No - you cannot do this. If he needs a monthly "income" of £400, how do you think you could convince the Revenue that it was really a loan and not salary, on which PAYE would be payable at least quarterly, now subject to penalties for late payment?
Thank you
Thank you both for your help so far.
I guess my question is, is it clear that HMRC would regard a monthly advance as salary on which PAYE would be due. It is not clear how much the company can afford to pay until the year end - in the meantime the director draws a monthly amount and then at the year end, all being well this can all be credited to salary. If not, the director would need to repay the loan or account for s419 tax until it is repaid.
I found the following in HMRC EIM 42280:
"Directors’ drawings
Directors very often draw money from the company during the year, which is debited to their loan account and repaid at the end of the year by crediting fees, or a dividend, voted or declared after the end of the year. Until that time, and in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director. The in-year drawings are not payments on account of earnings for the purpose of Sections 18(1) and 686(1)."
The driver of the question is to simplify admin so far as possible rather than to be sure the company can pay the salary, but it seems sensible to me to make it a loan in case that kind of flexibility is needed - its still early days for this company trading (successfully) in a difficult environment. The director has no other employment but has savings and investment income.
Any more comments would be appreciated.
OK! That's very simple!
If the director has no other employment, he is entitled to personal allowances of £6,475 against his salary from the company. If he pays himself no more than the NI Earnings Threshold of £5,715 in a tax year, he will have no PAYE deductions at all and so, nothing to pay over either during the tax year or at the end.
If he pays himself more than the NI Lower Earnings Limit of £5,044 in 2010/11 in order to qualify for state benefits, he will have to set up a PAYE scheme, file a nil payslip online at www.hmrc.gov.uk/payinghmrc/paye-nil.htm every quarter and at the end of the tax year, file a P35 and P14 in order to prove the entitlement to the state benefits, which he can do either online or using the Employer CD-ROM which he will be sent on registering for the PAYE scheme.
PAYE does not get any simpler than this.
Or he could pay himself the £400 a month that he needs (or anything up to £420 a month), forego the year's entitlement to state pension (don't forget that you only need 30 years now to qualify for a full state pension) and not worry about PAYE at all.
PAYE for sole directors
You can always ask the Revenue to put your PAYE scheme on an annual basis so you are not badgered for payments during the year. If no PAYE will be due for that year, they will usually agree to this. However, make sure you don't pay salary for the whole year up front as then there would be a PAYE bill for that month which you would have to request a rebate for after the end of the tax year. Usually it is best to wait until month 12 before paying salary to yourself as an owner/director and that avoids the hassle of monthly/quarterly payslips.
The OP is right about treating monthly payments as a loan ahead of salary. Nothing wrong with that unless the overdraft on the loan account exceeds £5,000 for more than a month (running from the 6th to the 5th) in which case you will need to work out 4% interest to avoid it being a taxable benefit reportable on a P11D. Watch the balance at the year end too as any overdraft (even if less than £5,000) will be a participator loan and incur tax at 25% unless repaid within 9 months. You then have to wait at least a year to get the money back after the loan is repaid. Even if you manage to clear the overdraft within 9 months you still have the hassle of completing a CT600A with your corporation tax return, so overdrafts at year end are best avoided. Most owner/directors have regular expense claims so this can be an ideal way of clearing any small overdrafts.
Chris
Don't borrow
“I would recommend your Director draw a monthly salary of £476 each month, then complete one payslip for March showing £5,712 … An overdrawn loan account is a separate issue and must be declared to HMRC.”
This is why I’ve been recommending NOT to borrow the money.
no deductions
Assuming a tax code of 647L (or at least higher than 571L), there would be no deductions for a salary of £472 or less per month.
For my clients, I tell them to draw a salary of £472 per month. I don't send monthly payslips to them unless they need them, but set a salary of £472 per month on Moneysoft and then just send them the P60 and P35 at the end of the year.
Obviously a bit ore complicated if the tax code is less than 571L.