Background:
My company will be trading for 4 months before the end of the individual tax year. Ideally I'd like to use my full personal allowance however this would mean effectively paying myself £2962.50/month . It is my intention for approx 80% of the amount to be credited to the directors loan account.
My business is in importing goods from china for sale accross the online marketplaces. I currently have 1 product in production ready to be launched January 1st and another product pre-production with the launch date set for January 22nd. I am looking to have 15 product lines by December 2019.
Question:
Is it acceptable to be paying myself as much as £2962.50 per month from month 1-4 to take advantage of my personal allowance and the coropration tax saving?
Please note:
£2500 out of the £2962.50 salary will be credited to the director loan account, with the remainder being paid to myself.
I will be reducing my salary to £2000/ month from the start of the next individual tax year (months 1-6 only half will be credited to the director loan account).
Replies
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I'm not typically one to say "Speak to your accountant", but on this occasion, it's appropriate.
If you don't have an accountant, now is the time to get one.
You've not indicated what you're remunerating yourself for, so it's not really possible to say. If it's commercially justifiable then I don't see a problem - £2,962.50 seems an awfully precise figure though and presumably purely driven my utilising your personal allowance?
Would £2106pcm not be a better amount?
Speak to your/an accountant - they’ll know your situation better than anyone on here.
There will be employees and employers national insurance so this plan may be sub-optimal. When was the company set up? If post 6 April then the national insurance may be higher as you only get the nil thresholds for the months you were a Director.
Whether you receive the cash or pay it to a Director loan account is irrelevant.
Also note that any losses generated in the company may be lost if it never makes a profit.
I would engage an accountant since there are likely other issues which need addressing and is also prudent for any new business, especially a cross border business.
More information needed
What did you earn for the other 8 months of the tax year ?
It's acceptable but there may be better options. With so little information about your corporate and personal affairs, it's impossible to give a balanced view.
You really do need to speak to your accountant.
Make sure your accountant sets you up a PAYE scheme.
I don't get it. You come up with a figure to pay yourself each month to use on your PA but then you say 2.5k of it will go through the DLA. So not quite sure how you think the PA is being used if it's a loan to the director.
You need an accountant now, because your about to make one massive balls up. And probably a lot more in the future also.
OP means of £2500 will be a credit to DLA, balance paid from the bank.
The OP isn't the first and won't be the last to refer to a DCA as a DLA. In fact, I think that's the normal AA nomenclature.
No-one has really addressed the question though. This company has not started trading yet. If the proposed salary payments render it technically insolvent, I question whether they can be made.
There is a regular contributor that specialises in questions like that.
It's a consideration but lots of businesses make a loss in the early months. It doesn't mean they're not viable in the longer term or that they can't meet their obligations.
How long has the OP been a director ? If less than 12 months, NI might be a consideration as he won't get a full twelve month earnings pereiod. It may still be beneficial to pay £2962, it may not.
Sorry, Lion, my brain is already winding down for Christmas.
We all know “yes but” means “no”.
Does
mean it is or isn’t a consideration?
"It's a consideration" means it's a consideration.
It doesn't mean that the salary makes the company insolvent or is in any way unable to meet its obligations.
Without a lot more - largely off-topic - information, I can't comment further.
Not wishing to sound unkind but this is a forum for accountants advising fellow accountants/bookkeepers, it is not for general advice. As others have suggested, you need to seek professional advice from a qualified accountant on this matter.
Best of luck!
Hi all,
Sorry for the delayed reply, it has been a hectic week!
Thank you for all of your replies, I have read through all of them.
Firstly I should give some background:
- I am a recent accounting and finance graduate. Whilst not qualified, I have a moderate knowledge of business tax law and its application.
- I have been living off savings since graduating this summer and as a result have my personal allowance intact
- My initial investment into the company is £5k so there's not much spare cash going round for an accountant yet!
- The date of incorporation was 4th December 2018 and I am on track to commence trading by 4th January latest.
It seems clear that the issue is not with the amount I pay myself, but whether said amount is reasonable and justifiable. Taking into account the above, here is what I propose.
First month salary is entirely foregone as no trading activities are undertaken.
My salary for months 2-4 (remainder of the individual tax year) is £2,300/ month and is calculated as follows:
-Min wage (£7.38) + Late working premium (£2.50) + Premium for knowledge gained in degree (£3) = £12.88/hr
- 9 hour days 5 days per week = 45 hours per week
- 48 work weeks = 2160 hrs/yr
- 2160 hrs @ £12.88/hr = £27,820 = approx £2,300/ month
A bonus of 50% of profits is also available at the end of month 4 should the profits exceed £1000. This bonus is capped at £5,000 (Profits of £10,000).
I'm sure that i'll find an accountant in 3 months time to get everything in order but for now I'm hoping this seems acceptable?
Are you doing the payroll filings yourself? If so then put the figures through your payroll software since there will be employee's NI and employer's NI (if you don't have any employees) on any salary above £3,500 (estimated).
I already advised this may be sub-optimal.
If the company is profit making then you can top up with dividends.
Why don't you just wait til March?
What do you mean by "acceptable"? Acceptable to whom? People here? I, for one, won't sue if you do as you say.
Agree with Matrix. You've not considered NI at all and you may have a big surprise when you run your payroll.
NI doesn't work like income tax.
I mentioned it myself earlier, as has Martix, but you don't seem to have taken any gorm.
Ironically the employee NI and employer NI would be approx £1,000 each which could have easily paid for the accountant.
So, more than the Income Tax he's saving.
Great plan.
You read of all the above then come to the conclusion that the issue is justifying what you pay yourself?!
Honestly, that is so far from being the issue you have no idea.
You really need to think about £8,060.
I had looked at the NI implications but I stupidly applied the salary across the whole year rather than the actual period in which it was earned.
Realistically I will be getting an accountant come March. It would however be useful to have something passable in place so as to minimise the fees.
I'll have a look at £8,060
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