My salary as a director

[Digimem]

Hi All
So basically I started my LTD business in September last year

As the business wasn’t really doing well at the starting, I decided not to take a salary to give the business the best possible chance. With no other sources of personal income (also my wife is a home maker) I have been living off our fast dwindling savings

But actually since March the business picked up and has been doing ok and since March to September 2020 the business has made a profit of £9,370

So I’ve set up a PAYE for myself starting this month.

But now I’m thinking...on the £9,370 profit for my first business year, I’ll have to pay 20% corporation tax

But really the business would not have this amount profit if I was paying myself a minimal wage (which, believe me, would have come in really handy!). I had no personal income since September 2019

Ideally I would like to take some back dated salary starting from the start of when I registered the business in September 2019, is this possible?

It’s not that I want to avoid the corp tax, but it’s more to do with the fact that virtually any business would show a profit on the books if it had no staff costs...and the extra money will really take the pressure off my personal finances

Any thoughts or advice is really appreciated

TIA

 

[DontAsk]

It’s not that I want to avoid the corp tax

That's exactly what you want to do. Tax avoidance is perfectly OK, legally and morally.

It sounds like you are passed the company's first year end so it may be too late.

If it possible, you will need to register for PAYE and explain why the payments are late.

Talk to your accountant.

 

[Mr D]

For future.
Its fairly common for directors to pay themselves a minimal salary and take some other money as shareholders payment of dividends.
For example the NI credit level of £8788.

https://www.pattersonhallaccountants.co.uk/optimum-directors-salary/

Talk to your accountant going forward regarding your income, tax avoidance is fine and is legal. Its tax evasion you don't want to get involved in - that is illegal.
However the company paying you a wage is legal and is an expense of the business.

Downside of paying such a low salary - as some found out this year - is that it doesn't give a lot of money to pay directors on furlough. So gain on the tax and NI route, lose out on the furlough....
Perhaps we won't have another furlough for a year or two. Or maybe later this year.

 

[Digimem]

That's exactly what you want to do. Tax avoidance is perfectly OK, legally and morally.

It sounds like you are passed the company's first year end so it may be too late.

If it possible, you will need to register for PAYE and explain why the payments are late.

Talk to your accountant.

Phew! I thought you guys were going to shoot me down about this!

I’ve been doing all my own accounts, but yes I will certainly speak to an account asap. Thanks

For future.
Its fairly common for directors to pay themselves a minimal salary and take some other money as shareholders payment of dividends.
For example the NI credit level of £8788.

https://www.pattersonhallaccountants.co.uk/optimum-directors-salary/

Talk to your accountant going forward regarding your income, tax avoidance is fine and is legal. Its tax evasion you don't want to get involved in - that is illegal.
However the company paying you a wage is legal and is an expense of the business.

Downside of paying such a low salary - as some found out this year - is that it doesn't give a lot of money to pay directors on furlough. So gain on the tax and NI route, lose out on the furlough....
Perhaps we won't have another furlough for a year or two. Or maybe later this year.

Thanks Mr D,
Yes I did know about paying a ‘tax efficient salary’. I researched it just before starting the business when I was optimistic that the business would get off to a good start.

Unfortunately for the first several months I struggled to break even, so the thoughts of paying myself went out the window!

 

[Mr D]

Phew! I thought you guys were going to shoot me down about this!

I’ve been doing all my own accounts, but yes I will certainly speak to an account asap. Thanks



Thanks Mr D,
Yes I did know about paying a ‘tax efficient salary’. I researched it just before starting the business when I was optimistic that the business would get off to a good start.

Unfortunately for the first several months I struggled to break even, so the thoughts of paying myself went out the window!

Lol.
Common enough among business owners. Our baby is more important than us so we take nothing that will harm it for a time.
Eventually, if we have sufficient business, the company can pay us. Maybe even pay us what we mistakenly believe we are worth.
Or at least more than we would get working the rest of our working life for someone else.

Plus it's more fun.

 

[STDFR33]

You could have run payroll, credited the salary to your directors loan account and taken the money when company funds permit.
Unfortunately, you’ve cost yourself a small fortune.

 

[Digimem]

You could have run payroll, credited the salary to your directors loan account and taken the money when company funds permit.
Unfortunately, you’ve cost yourself a small fortune.

oh dear.

I have a zoom call scheduled with an accounts this Thursday, I'm hoping there's something we can do.

I've been reading that it might be possible to declare a bonus?

 

[Digimem]

If this was one month ago (September just before my year end), could i have taken the money out then created a backdated payroll?

 

[Chris Ashdown]

You still have your tax free amount and if you have not closed the September accounts then you may be able to get something sorted with the accountant

 

[MyAccountantOnline]

Hi All
So basically I started my LTD business in September last year

As the business wasn’t really doing well at the starting, I decided not to take a salary to give the business the best possible chance. With no other sources of personal income (also my wife is a home maker) I have been living off our fast dwindling savings

But actually since March the business picked up and has been doing ok and since March to September 2020 the business has made a profit of £9,370

So I’ve set up a PAYE for myself starting this month.

But now I’m thinking...on the £9,370 profit for my first business year, I’ll have to pay 20% corporation tax

But really the business would not have this amount profit if I was paying myself a minimal wage (which, believe me, would have come in really handy!). I had no personal income since September 2019

Ideally I would like to take some back dated salary starting from the start of when I registered the business in September 2019, is this possible?

It’s not that I want to avoid the corp tax, but it’s more to do with the fact that virtually any business would show a profit on the books if it had no staff costs...and the extra money will really take the pressure off my personal finances

Any thoughts or advice is really appreciated

TIA

You can't back date a salary for the last tax year which is such a shame as you would have been able to save some tax with no other personal income.

If you had paid the entire profit as a tax free salary that would have saved £1,780 Corporation tax (not taking into account the NIC on the salary)

You can certainly look at paying a salary going forward - how much will give you the best saving depends on your income and circumstances for this current tax year. Generally a mix of salary and dividend gives the biggest tax saving. An accountant will be able to advise you of this.

 

[Digimem]

You can't back date a salary for the last tax year which is such a shame as you would have been able to save some tax with no other personal income.

If you had paid the entire profit as a tax free salary that would have saved £1,780 Corporation tax (not taking into account the NIC on the salary)

You can certainly look at paying a salary going forward - how much will give you the best saving depends on your income and circumstances for this current tax year. Generally a mix of salary and dividend gives the biggest tax saving. An accountant will be able to advise you of this.

Hi, thank you very much for your reply and advice, much appreciated.

I’ve been reading it might be possible to declare a director bonus for the business year, is that an option?

Thank you

 

[MyAccountantOnline]

Hi, thank you very much for your reply and advice, much appreciated.

I’ve been reading it might be possible to declare a director bonus for the business year, is that an option?

Thank you

You can pay a bonus now but you cant back date it, any bonus paid now will fall into this current tax year.

 

[UK Contractor Accountant]

I’ve been reading it might be possible to declare a director bonus for the business year, is that an option?

by careful use of a provision for bonuses in the year end accounts and accounts prepared using UK GAAP (FRS12 & FR21) you can get a tax deduction for last year end accounts.

You have to follow a set procedure and produce the correct documents in support of the provision for bonus.

 

[Digimem]

You can pay a bonus now but you cant back date it, any bonus paid now will fall into this current tax year.

oh god, so literally one week ago i could have done it?

 

[Digimem]

by careful use of a provision for bonuses in the year end accounts and accounts prepared using UK GAAP (FRS12 & FR21) you can get a tax deduction for last year end accounts.

You have to follow a set procedure and produce the correct documents in support of the provision for bonus.

ah ok, will definitely ask the accountant about this. thanks

 

[Newchodge]

As a sole director you can pay yourself up to £8784 in a lump sum, at the end of March, without incurring any Ni or income tax liability (if you have no other PAYE income). If your wife is a director you can pay each of you up to £9,504 in a lump sum, at the end of March. This is dependent on your both having been directors since 6 April this year. Or you can pay yourselves the total sum as a mix of lump sum and monthly payments. These payments will reduce your corporation tax in the CT year in which the payments are made. If there is insufficient money in the business you can pay yourselves as a credit to the directors' loan accounts.

You will have to run payroll.

 

[MyAccountantOnline]

oh god, so literally one week ago i could have done it?

No I'm referring to the tax year for you (bear in mind you and your limited company have separate tax affairs) When looking at your personal income you have to consider the tax year ie 6 April to 5 April. I'm saying you can't back date a salary to the tax year to 5 April 2020.

 

[Digimem]

No I'm referring to the tax year for you (bear in mind you and your limited company have separate tax affairs) When looking at your personal income you have to consider the tax year ie 6 April to 5 April. I'm saying you can't back date a salary to the tax year to 5 April 2020.

So if my personal tax year is April 2020-April 2021

And my business Tax year is September 2019-September 2020, can I take a bonus from my business year 19-20?

Sorry i think im confusing myself, was up all night researching :|

 

[Spur Support Services]

There is no reason why you can't accrue the salary you expect to pay yourself within your September accounts.
As others have said, to keep this under the 2020/21 employment income NIC threshold, limit the Sept 2020 accrual to £4,394, which can be paid at your convenience, but certainly within 6 months. Also start paying yourself £732 per month from now on.

This Employment Payment should be reported to HMRC as it is paid.
If you want to perform this Payroll administration task yourself. There is free HMRC payroll software available https://www.gov.uk/basic-paye-tools or if you use cloud accounting software, there is often a bolt on facility, which will then deal with your accounting postings automatically.

As it is your first year, ensure that you have recognised all your relevant costs and business equipment to minimise your corporation tax. You may need assistance in this area if you end up in a tax paying position, but again, if things are tight you might want to perform the task yourself.

For shoe string budget, I would advise using the HMRC corporation tax filing functionality to prepare/file accounts both with Companies House and with HMRC as it saves duplication of the task. https://www.gov.uk/file-your-company-accounts-and-tax-return ... hmmm.... might have gone off course again.... bloody accountants.. we ramble sometimes...

If you don't like business admin and feel a little sick having read the above, then contact one of us accountants.

 

[Digimem]

There is no reason why you can't accrue the salary you expect to pay yourself within your September accounts.
As others have said, to keep this under the 2020/21 employment income NIC threshold, limit the Sept 2020 accrual to £4,394, which can be paid at your convenience, but certainly within 6 months. Also start paying yourself £732 per month from now on.

This Employment Payment should be reported to HMRC as it is paid.
If you want to perform this Payroll administration task yourself. There is free HMRC payroll software available https://www.gov.uk/basic-paye-tools or if you use cloud accounting software, there is often a bolt on facility, which will then deal with your accounting postings automatically.

As it is your first year, ensure that you have recognised all your relevant costs and business equipment to minimise your corporation tax. You may need assistance in this area if you end up in a tax paying position, but again, if things are tight you might want to perform the task yourself.

For shoe string budget, I would advise using the HMRC corporation tax filing functionality to prepare/file accounts both with Companies House and with HMRC as it saves duplication of the task. https://www.gov.uk/file-your-company-accounts-and-tax-return ... hmmm.... might have gone off course again.... bloody accountants.. we ramble sometimes...

If you don't like business admin and feel a little sick having read the above, then contact one of us accountants.

That sounds bloody perfect!! That's exactly what I want to achieve.

Your are a star, thank you!