PAYE Question

[Batra Ventures UK Limited]

What should be the weekly TAX/NIC free pay for an employee who hasnt earned anything this year.

We are now in week 23, how much should be paid weekly so we cover the total personal allowance and dont pay any tax either?

I can see the future with a new accountant again. God no.

[David Richards]

What should be the weekly TAX/NIC free pay for an employee who hasnt earned anything this year.

We are now in week 23, how much should be paid weekly so we cover the total personal allowance and dont pay any tax either?That depends on the employee's tax code.

Assuming a tax code of 647L, they get £6,475 tax free for the year. Which is about £125 a week. For week 23, it's £2,866.

[Batra Ventures UK Limited]

That depends on the employee's tax code.

Assuming a tax code of 647L, they get £6,475 tax free for the year. Which is about £125 a week. For week 23, it's £2,866.

£125 isnt NI free. £110/week is what I understand in TAX/NI free.

[Batra Ventures UK Limited]

Even at £125 it should work out at £3625/year.

(52-23)*125

[Batra Ventures UK Limited]

Sorry I am wrong, its £125.

But I went to to payroo to check the nett payment at £125/week, it comes back with NI deductions?

[David Richards]

£125 isnt NI free. £110/week is what I understand in TAX/NI free.All the current thresholds are on the HMRC website (http://www.hmrc.gov.uk/paye/rates-thresholds.htm).

[David Griffiths]

You are stuck between using up the personal tax allowance and the NI limits. If nothing has been earned this year, then you can divide the £6475 by the number of weeks left. So if there are 29 weeks left, then the figure is going to be about £220.

But of course that leads to employee and employer tax and NI at 23.8% on the excess each week above £110 - about £26 total per week.

That's the general position - there are of course all sorts of variations depending on if the employee is a director, when appointed, and the timings of payments

[Batra Ventures UK Limited]

You are stuck between using up the personal tax allowance and the NI limits. If nothing has been earned this year, then you can divide the £6475 by the number of weeks left. So if there are 29 weeks left, then the figure is going to be about £220.

But of course that leads to employee and employer tax and NI at 23.8% on the excess each week above £110 - about £26 total per week.

That's the general position - there are of course all sorts of variations depending on if the employee is a director, when appointed, and the timings of payments

Director started in week 20 . We intend to keep it weekly but wouldnt make a difference if its monthly.

[Batra Ventures UK Limited]

I dont think I am getting proper advise from new accountant. I changed in feb to this firm and now the person who dealt with me, which initally was the reason I moved to this firm has now left and the new person is a bit of a newbie without any qualifications.

[David Griffiths]

I take it that week 20 was the date of appointment as a director? You're probably aware that directors' NI is calculated on a single pay period for the tax year. In this case with appointment as a director, the NI allowance will be 32/52 of £5720 = £3,520, so that's the most that you could pay as salary without NI being paid, but of course that leaves personal allowances unused. If week 20 was the date that the director started work but appointment was earlier in the year or even before the year end, then the figure would be different

NI of course is higher than tax so on the face of it there's no point paying NIable salary to save tax. However, taking into account the tax relief that the company gets for the salary and its share of NIC, the difference is trivial. I calculate that if the company pays out £6475 as a salary, the net amount received by the employee is only £4 less than the net cost to the company after tax relief.

You might be able to find ways of getting income to the director that don't attract NI. That could include interest (at a commercial rate) on any director's loan balance, but don't forget that the company has to deduct and account for income tax, which is then reclaimed by the recipient. Probably not worth the hassle for the amounts that we are talking about.

The other thought is a half way house, which pays benefits such as health insurance which only attracts employers' Class 1A NIC, and not the employee chunk. Again, is it really worth the effort for a small one off amount?

[Batra Ventures UK Limited]

Thats a lot of valuable information, the total DL loan balance is somewhere in the region of £100k.

Sorry I misled, director was appointed in june.

[David Richards]

Sorry I misled, director was appointed in june.In that case, ignore everything that has previously been said. Weekly NI thresholds are irrelevant for directors. What is relevant in this case is the date that the person was appointed a director - specifically in which tax week did this happen.

[Batra Ventures UK Limited]

In that case, ignore everything that has previously been said. Weekly NI thresholds are irrelevant for directors. What is relevant in this case is the date that the person was appointed a director - specifically in which tax week did this happen.

Why does my accountant doesnt know any of the above?

[David Griffiths]

Why does my accountant doesnt know any of the above?

Nobody knows everything, but I would expect anybody dealing with small companies to know that, and for anybody dealing with payroll it's a must.

[Peasie]

Nobody knows everything,
I've met a few folk in pubs over the years that do.

[David Richards]

Why does my accountant doesnt know any of the above?It's most likely that they do; but if you don't ask the right question, or if you miss out important details...

Nobody knows everything, but I would expect anybody dealing with small companies to know that, and for anybody dealing with payroll it's a must.However, I have come across many instances where a customer has contacted our support line saying that their accountant has told them the NI is wrong - only to later establish that the accountant has calculated NI as if they were an employee rather than the director's method, or that the pro-rata thresholds have been calcualted incorrectly. So maybe it's not as well known as we would like.

[Peasie]

However, I have come across many instances where a customer has contacted our support line saying that their accountant has told them the NI is wrong - only to later establish that the accountant has calculated NI as if they were an employee rather than the director's method, or that the pro-rata thresholds have been calcualted incorrectly. So maybe it's not as well known as we would like.
I thought you were allowed to do that as long as the final payment in the tax year was calculated using the percentages and adjusted accordingly.

[David Richards]

However, I have come across many instances where a customer has contacted our support line saying that their accountant has told them the NI is wrong - only to later establish that the accountant has calculated NI as if they were an employee rather than the director's method, or that the pro-rata thresholds have been calcualted incorrectly. So maybe it's not as well known as we would like.I thought you were allowed to do that as long as the final payment in the tax year was calculated using the percentages and adjusted accordingly.Indeed you can use the employee method and adjust at the end of the year. It's because our software has done it and the accountant hasn't which causes the queries.

The other problem is that in many cases using the employee method and adjusting at the end of the year simply isn't appropriate, as it leads to a large adjustment and potentially even negative net pay at the end of the year.

I always suggest that it's only OK to use the employee method and adjust at the end of the year if the director:
Will be paid a regular weekly wage/monthly salary
Will never take a bonus
Will never skip taking a payment, to help with the cashflow
Will not join/leave a pension scheme during the tax year
Will not reach state pension age during the tax year
Will not change NI category for any other reason during the tax year
Will not leave the company during the tax year
Will not die during the tax year
If you can guarantee all of the above, then (and only then) is it safe to use the employee method and adjust at the end of the year. If not, then you should use the director's method all the time. :)

[David Griffiths]

IIf you can guarantee all of the above, then (and only then) is it safe to use the employee method and adjust at the end of the year. If not, then you should use the director's method all the time. :)


Including the not dying bit? Most of my clients are prepared to take a chance on that one! :D

[Batra Ventures UK Limited]

Yes but if an accountant doesnt tell us the best way then its not for the clients to find the ways and tell their accountants.

I wasnt impressed when I put £1/hr for a director and see if we can get subsistence claiming he worked more than x hrs a day out of office and she mentioned that we cant pay under minimum wage to directors.

I want an accountant who tells us all of this, as this is perfectly legal.

[Tom McClelland]

Indeed you can use the employee method and adjust at the end of the year. It's because our software has done it and the accountant hasn't which causes the queries.

The other problem is that in many cases using the employee method and adjusting at the end of the year simply isn't appropriate, as it leads to a large adjustment and potentially even negative net pay at the end of the year.

I always suggest that it's only OK to use the employee method and adjust at the end of the year if the director:

Will be paid a regular weekly wage/monthly salary
Will never take a bonus
Will never skip taking a payment, to help with the cashflow
Will not join/leave a pension scheme during the tax year
Will not reach state pension age during the tax year
Will not change NI category for any other reason during the tax year
Will not leave the company during the tax year
Will not die during the tax year

If you can guarantee all of the above, then (and only then) is it safe to use the employee method and adjust at the end of the year. If not, then you should use the director's method all the time. :)


I think that is extreme, and it overstates HMRC's own published rules on the subject. CA44 para 9 merely states that you shouldn't use this method unless the director receives regular pay above the earnings threshold. The director's last payment in a PAYE year should always be made using cumulative rules so regardless of when they leave the correction resulting from cumulative calculation would always be collected.

[David Richards]

I think that is extreme, and it overstates HMRC's own published rules on the subject. CA44 para 9 merely states that you shouldn't use this method unless the director receives regular pay above the earnings threshold. The director's last payment in a PAYE year should always be made using cumulative rules so regardless of when they leave the correction resulting from cumulative calculation would always be collected.It is somewhat tongue-in-cheek. The intention is to highlight some things that may not be considered when choosing which NI method to use. They are all things which can potentially cause a large adjustment when the recalculating NI for the final pay period of the year.

A common scenario is caused by paying a bonus. A director receives a large bonus or other one-off payment which takes them well above the monthly UEL. When the NI is recalculated for the final pay period, the amount of NI due is more than the pay for that month, leaving them with a negative net pay.

Queries about Director's NI (e.g. why is it different this month/why has it calculated a refund/why has it taken such a large amount/why is it 'wrong') are amongst the most common calls we get to our support line at payroll year-end. And it's always due to recalculation of Director's NI in M12 after having used a non-cumulative method for M1-M11.

[Tom McClelland]

It is the directors rules in general that cause the queries, not any particular method of operating them. If you use them from the start we find that you get just as many queries about things like "why am I paying NI in M3 when I didn't pay any in M1 and M2?". Or in later months for high paid directors, "Why has my NI nearly dropped to zero?".

In the situation where a director being calculated under the Alternative Arrangments gets a large bonus early in the year it is an important part of managing the payroll to let them know that they'll be paying lots of NI in M12 or earlier if they leave the company. But agreed, plenty of accountants/payroll managers might not realise the implications, or may just plain forget.