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 (35)
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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.
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.)
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.
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.
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.
Quote:
“I am a director of a one person Ltd consultancy”
Something is not adding up here :O
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.
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.
It seems to me that the damage has been done and you are left to tinker or rewrite history.
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.
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.
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
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.
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.
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.
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.
“They're now even suggesting you should wind up your company”
Who did that? Spongebob ...
No one's even mentioned IR35 yet. Have you considered that?
What exactly does this other person on your payroll do?
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.