Director payment from a company with low- and irregular-income

[Matt21]

Hi all,

Early last year I set up a Limited company with two students I've known for years. The company creates software, in particular we are making a computer game, but on the side we advertise ourselves for creating educational software.

For much of 2014 we were dormant, part-time-studying, part time working on the game. From November 2014 I generally dedicated my weekdays to the afore-mentioned game, but money was still a long way off and I lived totally out of savings. We then got an offer from an overseas educational establishment to create software for them at £9000 for the job (which was a bargain considering two of us are highly qualified and worked on it for about three months). That work finished in February and since then I have dedicated all my time on the game again, but without any income.

Well, finally the £9K has come through into the company account, and it's welcome as I've been living at the bottom of my overdraft for months now.

But my problem is this: myself and a colleague deserve all of this money when you factor in the amount of time spent working on the software (ignoring the game even). So let's say we each deserve £4.5K from the pot. The question is how exactly we should get the money to ourselves? It is unclear whether and even when we will get paid again: we might close the company soon depending on feedback regarding our game, with the only debts really being time that each of us has put in (to varying degrees). Factors:

- I want the owed £4.5K to be paid to myself and my co-director in one go.
- Even after this payment, we will both be well below the personal-tax threshold (it will actually constitute my entire income for the past year).
- It's entirely possible that the company will never receive payment again.
- It would be even considered "good" if we managed to raise a similar amount again this financial year, so I'm likely to be stay below said threshold over the course of the year.
- I feel owed by the company for a lot of work done so far.

So how to get this money? PAYE seems a little over-the-top given that the well of money will dry up as soon as it came. I like the idea of invoicing the company for work done and then handling my own tax and NI contributions.

This is less about minimising tax and more about just getting my money in a manner that suits me and doesn't raise the backs of HMRC... although I wonder how much they would care about a company with just £9k turnover...

Warmest regards,
Matt

 

[john1989]

Whether you think you deserve it all or not, you can't just take the money out of the business. You and the company are separate legal entireties.

You can remunerate yourselves by PAYE or dividend. But must also pay corporation tax on the profits.

 

[Matt21]

Whether you think you deserve it all or not, you can't just take the money out of the business. You and the company are separate legal entireties.

I understand this, but I could potentially invoice you (an undeniably separate entity) for work that I have done for you. And so I can't see why I cannot also invoice the company in a similar way.

I'll come back to your second paragraph shortly.

 

[Matt21]

Regarding the second part, let's say I went through PAYE. I don't know what scope there is with PAYE... could I effectively pay out all of the money in one go, marking that it covered three months of work? And then is it possible to just stop the payments.

My fears with the PAYE route were:

1. It might expect a monthly repayment of similar size. Obviously with no reliable income, this can't be done by our company. It really should be considered a one-off. But maybe this is totally incorrect... I have after all had temporary jobs lasting summer months before which must have been paid via PAYE.
   
2. It expects my income per year: which at the moment could be £4.5K. It could be £8K. We could be lucky, it could be £50K... this will affect tax contributions and the repaying of my student loan of course, complications I wanted to avoid, because on so little income I shouldn't be paying either, and yet I get the feeling that through some error they may be taken out.

And while we're on the subject, I've always wondered: corporation tax is applied to profits, of course. But the boundary of profit isn't clear-cut in my head... if we pay ourselves £500 a month each, the money on the companies accounts will go down gradually. Let's say the end of the financial tax year comes for the company and we have £3K left in the company's accounts, which would then we paid out to two of us over the next 3 months. Does that £3K count as profit simply for being there? Even though it is ear-marked to paid out in the coming months?

Hopefully you can assuage my fears.

 

[Scalloway]

If you are a director of a company you can't invoice it for work done on its behalf.

If you have no other income in the year to 31 March 2016 then PAYE is the way to go. You will pay no tax on it and the company will pay no tax either.

 

[Matt21]

If you are a director of a company you can't invoice it for work done on its behalf.

This clarity is greatly appreciated.

If you have no other income in the year to 31 March 2016 then PAYE is the way to go. You will pay no tax on it and the company will pay no tax either.

Having never used PAYE before, can you confirm that it is possible to do a one-off payment of £4.5K to each of us (myself and one co-director)?

Also, to rephrase an earlier question of curiosity regarding the definition of "taxable profit": if at the end of the financial year I have £3000, but I intend on paying this to employees via PAYE over the coming 3 months (April, May, June), am I expected to pay corporation tax on this £3000? Effectively I have the £3000 earmarked for expenses but if I have to pay the corporation tax on this money then I have £2400 left and clearly cannot fulfil the 3 months of payment I had planned.

 

[James MIller]

You mention you and two students. Are you all directors and shareholders? Or is your colleague somebody else? I would agree with Scalloway that PAYE would seem to be the way to go.

 

[Matt21]

You mention you and two students. Are you all directors and shareholders? Or is your colleague somebody else? I would agree with Scalloway that PAYE would seem to be the way to go.

All directors and shareholders with equal shares. Colleague is one of the directors.

 

[James MIller]

If there are three directors shareholders, dividends would have to be awarded to all three and not just two. PAYE is the way to go. A couple of things, set the scheme up, make sure you mark each as a director as NI calculation is different, if you qualify claim the £2000 nic rebate, this will only stop you paying too much, you will need to file FPS and EPS returns, once the payment is made assuming there is going to be nothing else issue P45s and close scheme.

 

[Matt21]

That's a great set of instructions. Thank you James. I've been totally convinced that PAYE is the way to go. I'll probably be back one day with more questions

Thanks again.