Share this content
0
959

Is it possible to expense future-year salary?

Can director's salary expected for 2019 be expensed by a company in 2018?

Hi.

I am a director of a one person Ltd consultancy with minimal expenses, mostly from travel. My company had revenue of around £40,000 in the year ending July 2018 but the jobs are getting few and far in between and it makes no sense to draw the whole amount as salary in the same period, since there might not even be any income next year. Instead, I will pay myself around £18,000 under PAYE for the company's accounting period ending July 2018. After that, I would like to pay myself the remaining amount again as salary, but in the next company tax year (also £18K, or whatever remains in the company at that point).

QUESTION: Is there a way for director to book his expected next-year salary as company expense in 2018 for the purposes of CT600? Or is the proper procedure to show the company profit in 2018, pay tax on it, but next year declare a loss (as the company will likely have no income but will have salary expense), and carry back this loss against 2018 profit, getting a HMRC company tax refund? The latter seems like a lot of complication and paperwork for what essentially becomes a "wash" transaction. 

Thank you for the advice!
Seb

Replies

Please login or register to join the discussion.

avatar
23rd Jun 2018 17:18

No, is the short answer. You would really benefit from an accountant.

Thanks (1)
23rd Jun 2018 17:38

You are asking your question back to front.

You should be asking whether, if you vote yourself a bonus before the end of July, but don’t pay it until 2019, the bonus can be treated as an expense in your 2018 accounts. The answer is yes.

You should also be asking whether a bonus provided for in your 2018 accounts will be allowable for corporate tax in the same year. The answer is yes provided the bonus is paid within nine months of your company’s year end.

Whether taking nearly all your company’s profit out as salary is tax efficient is another question altogether.

Thanks (1)
avatar
23rd Jun 2018 18:12

John appears to be ignoring Rule 3: if you vote yourself a bonus in July, you are taxed under PAYE as if you had received it in July. It doesn't matter that you don't actually receive it until 2019.

Be careful taking advice in here - or anywhere it's free. It's often worth less than you're paying for it. (People reply quickly and without the due care and attention they give to paying clients. I know, because I do it too.)

Thanks (1)
avatar
23rd Jun 2018 19:57

@johngronanjga - thank you, your answer gives me something to investigate further. Yes I realise it is not perhaps fully tax-efficient but the amounts we are talking about are fairly small, I doubt there would be huge savings by drawing dividends especially with the latest changes in dividend taxations.
@Accountant A - Yes, I know, and I fully realise it can be annoying for you to see these 'naive newbies' coming on the forum in search of free advice while ignoring the profession. Do you know however whether any accountants actually advise on a concrete issue for a fee, rather than take on accounts as an ongoing service? (I suspect though this kind of setup is more the domain of expensive tax advisors?).
@Tax Dragon - thanks for the caveat! (hat tip)

Thanks (0)
avatar
By Matrix
23rd Jun 2018 22:06

PAYE is applied when the bonus is paid.

The tax rate on dividends is less than the NI on the additional salary so the salary is costing you more, especially if you are voluntarily paying employer's NI, there is no need for this and the DIY approach is costing you more than an accountant's fee.

Thanks (1)
avatar
to Matrix
24th Jun 2018 14:34

Hi. Yes good point. Although I am not paying employer's NI (due to NICs Employment Allowance) so the difference here is 7.5% vs 12% Employee NI on the marginal income (plus the £150 one effectively gets "for free" due to the £2,000 of dividends not being taxed).

Plus 1% difference betw 20% personal tax rate and 19% company rate. On such relatively small income yes I could perhaps just about break even between getting the accountant do this, and/or still "keeping it simple".

Thanks (0)
avatar
to breathwell
24th Jun 2018 15:00

breathwell wrote:

Although I am not paying employer's NI (due to NICs Employment Allowance) so the difference here is 7.5% vs 12% Employee NI on the marginal income

I suggest you reconsider the availability of the EA for a PSC with no other employees apart from a director.

Thanks (1)
avatar
to free-rider
24th Jun 2018 15:09

thanks but there's one more, unrelated, employee

Thanks (0)
avatar
By Matrix
to breathwell
24th Jun 2018 16:02

OK so the £40k is before all expenses including staff? And this staff member is earning more than £8,424?

Unless you really know what you are doing, running the payroll yourself is also risky but saves on unnecessary professional fees.

Thanks (1)
avatar
to Matrix
24th Jun 2018 19:29

Yes, earning more than that.

Thanks (0)
By RedFive
to breathwell
24th Jun 2018 16:54

Quote:
“I am a director of a one person Ltd consultancy”

Something is not adding up here :O

Thanks (1)
avatar
By Matrix
to RedFive
24th Jun 2018 17:16

Loads of things are not adding up, such as why the company has been set up at all given the owner is paying more tax than if they were a sole trader.

Thanks (1)
avatar
to Matrix
24th Jun 2018 19:34

Very simply, the original question was a simplification, as the other matters didn't seem to me to be essential to the question being asked (and people are not going to read paragraphs upon paragraphs). Anyhow, thanks to everyone for pointing out the rules for Employer NI allowance; that issue had slipped my mind, but the restriction fortunately doesn't apply.

Thanks (0)
avatar
to Matrix
24th Jun 2018 19:43

P.S. As to why it was set up as a Ltd company - simply, the client required this legal form.

Thanks (0)
avatar
By Matrix
to breathwell
24th Jun 2018 15:37

To add that the company would also need to qualify for the employment allowance in the tax year when the bonus is paid, going back to your original question on the bonus.

Thanks (1)
avatar
to Matrix
24th Jun 2018 19:46

Thanks. Yes, that will likely be the case if the other person (the nondirector employee) keeps working (he does small jobs here and there, and I pay him salary for what he brings, minus small expenses).

Thanks (0)
24th Jun 2018 17:48

The horse has bolted and the stable has burned down. Now to falsify the insurance claim.

Thanks (1)
avatar
to andy.partridge
24th Jun 2018 22:15

Hi. There are many ways to interpret this gnomic statement and I would not know what you are exactly intimating. The issue, overall, is simply that the company received a pot of income for my prior work, but as I am uncertain what would happen in the future (so far I've not been successful finding more contracts), I would therefore prefer to spread my salary (that gets paid out of that income) over the future year as well. I appreciate the advice on the efficient ways to "extract" company profits. This of course is related to my question. But for the amounts we are discussing, I think the differences will be modest, likely less than £1000, hence I don't want to overcomplicate things too much with paperwork and forms required to achieve this. Overall, I hope asking about legal/acceptable ways to smoothen my income stream rather than pay more taxes due to one big "bump" is a sane approach?

Thanks (0)
to breathwell
24th Jun 2018 22:16

It seems to me that the damage has been done and you are left to tinker or rewrite history.

Thanks (1)
avatar
to andy.partridge
24th Jun 2018 22:34

Oh, in that sense... perhaps.
From other forums and generally in life, my habit is to ask for information by providing essential details and simplifying away the details that are not essential. For example, even though the long-term financial planning would be just as relevant to my situation and my question ("why are you trying to do that? for what purpose?"), I am not crazy to ask or expect that people would opine on this. This would be just too much "to take in" from a forum question.

Having said that, it is clear from the above that I didn't draw the boundary between essential and non-essential quite right, as the topic of NI credits has shown.

Thanks (0)
avatar
By Colinc
24th Jun 2018 21:23

Have you considered extending the company year end ?
If the 6 months extension has no sales or very low sales then it might go some way towards what you want.

Thanks (1)
avatar
to Colinc
24th Jun 2018 21:59

Yes, but would it not be even simpler to do this: declare profits for the current year (£20K), then declare loss for the next year (due to salary being paid out of zero income). This way, there is no messing with the Companies House, no weird calculations and apportioning of income, etc (I assume smth along these lines would be required). Then, just claim for the trading loss to be offset against profits for the earlier year.
?

In my original question I was wondering whether there is even need to do *that* (i.e. carry back the loss) when one is a company director.

Thanks (0)
avatar
By Matrix
to breathwell
24th Jun 2018 22:36

Sorry to labour the point but you seem to be over focussed on saving corporation tax in the company for an accounting period rather than on minimising your personal tax position each tax year. Since you don't know if you would have an employee and can't forecast income for 2019-20 then I would not recommend paying the bonus in the future (if that is what you meant). If, alternatively, you would be paying both the £18k salary and the £18k bonus in the same tax year, I expect the additional tax would be higher than the £1k that you mention above.

Thanks (1)
avatar
to Matrix
24th Jun 2018 22:51

> ...over focussed on saving corporation tax in the
> company for an accounting period rather than on
> minimising your personal tax position each tax year.

Yes, somewhat but not quite. I want to minimise the personal tax position, sure. But I am just not wholly familiar with the paperwork for carrying back the loss and thought something even simpler can be done by declaring a director's bonus, or something similar (I am pretty sure I will want to pay myself at least £12K next year).

> Since you don't know if you would have an employee
> and can't forecast income for 2019-20 ...

Yes you are right, I am not 100% sure the income will be definitely nil. In fact, I hope not and that I will eventually find a new contract. But the way I look at it is: if it's nil, then I will have dealt with it today by following the advice given (with some checking and consideration of course). Whereas if it's not nil, well, then it's money in the pocket one way or another... in fact unless the market improves radically, this will just likely just result in being "back to square one", i.e. the same situation as today: more profits in the company than I feel I am "safe" to spend in the current year).

> If, alternatively, you would be paying both the £18k
> salary and the £18k bonus in the same tax year, I
> expect the additional tax would be higher than the £1k
> that you mention above.

That's exactly what I am trying to *not* do, pay everything out in one tax year.

Thanks (0)
avatar
24th Jun 2018 22:32

You sound pretty set on your method, so you’ll have to pay the ct in year 1, then declare a loss yr2 & claim carry back relief

Thanks (1)
avatar
to atleastisoundknowledgable...
24th Jun 2018 22:37

Thank you. So, you are saying there is definitely no way to put the bonus (or something along these lines) on the books for year1, pay it in year2 (and PAYE on it done in year2)?

Thanks (0)
avatar
24th Jun 2018 23:42

If you want a black and white answer. No. You cannot put through future expenses in the current year.... otherwise who would ever pay any tax?

Also, your salary next year is unlikely to be tax deductible for the company anyway. To be tax deductible an expense must be incurred ‘wholly and exclsuively’ for the purpose of the trade... sounds like there is no trade occurring anymore...

There are some good tax planning opportunities here... if you know what you’re doing.

Thanks (2)
avatar
By Matrix
to Adam12345
24th Jun 2018 23:58

You can if the bonus is paid within 9 months. However the net amount would be smaller than expected as would have to be paid in month 1 so for this reason, and all the many reasons above, this is sub-optimal.

I agree there are loads of missed opportunities, especially if the company ceases to trade.

Thanks (1)
avatar
to Matrix
25th Jun 2018 09:08

Yes, but if it goes through the accounts, you are going to have to complete an RTI when you post the entries as the director would've become 'entitled' to the payment.

I assume the OP was wanting to put 2x salary through in the one year for corporation tax but spread it over two for income tax... which simply isn't possible.

Thanks (2)
avatar
25th Jun 2018 07:12

Turns out John was right after all - you did ask the wrong question. Meanwhile, in the absence of relevant information (and the presence of contradictory information), respondents are making hasty assumptions and reaching various conclusions.

They're now even suggesting you should wind up your company, even though you have suggested it will be useful to you in the future.

I stand by what I said above. We're having to take what you say with a huge pinch of salt, coz it doesn't stack up; you should treat the responses in the same manner.

I wish you well, but I'm out.

Thanks (1)
avatar
to Tax Dragon
25th Jun 2018 07:24

“They're now even suggesting you should wind up your company”

Who did that? Spongebob ...

Thanks (1)
avatar
to atleastisoundknowledgable...
25th Jun 2018 10:33

I suppose, it was suggested above that the company is not even trading (so that's the next association that comes in mind: close it).

I would disagree that it's not trading because I'm still actively seeking clients, but if the well keeps being dry, it may be indeed something to think about!

Many thanks.

Thanks (0)
By cfield
25th Jun 2018 10:55

No one's even mentioned IR35 yet. Have you considered that?

What exactly does this other person on your payroll do?

Thanks (0)
to cfield
25th Jun 2018 12:46

Yes, that's what I thought when the OP said the client required a limited company.

Thanks (0)
avatar
By SXGuy
25th Jun 2018 15:20

Rather than lack of info I think people replying are reading to much in to it.

The answer to your question is No.

Further info would be to just show the paye in Yr 2 and use losses to reclaim tax in Yr 1.

Whether you wind the company up after this is irrelevant to the question.

Thanks (0)
Share this content