Pay salary once every year

[fraser1]

Can a managing director pay themselves a salary once every year? If yes, can they take the salary out just before the end of a tax year?

 

[g]

Seems permissible.

More info at https://www.gov.uk/government/publi...-2017-employer-further-guide-to-paye-and-nics

 

[fraser1]

Thanks for the quick reply

If I knew the net profits for the year were say £5000. I would take out the £5000 as a salary just before the end of the tax year. Since the tax-free Personal Allowance for Income Tax is £11,500. I wouldn't have to pay any Corporation Tax or Income Tax on the £5000. Is this allowed?

 

[g]

Is this allowed?

I don't know enough to answer (withdrawing an amount based on a predicted year-end financial).

This is a question for your accountant... and likely someone who knows about such stuff will add an answer here.

 

[Scalloway]

If you have no other income in the tax year then you will pay no personal tax on £5,000. It is a legitimate deduction for Corporation Tax.

 

[LiveNetworks Ltd]

How you draw a salary is entirely up to you up to the personal allowance.

Remember you're going to be getting involved in the PAYE Real time reporting and you're going to have Employees and Employers National Insurance to consider which isn't calculated on the same basis as income tax!

 

[Adam93]

Yes it is allowed, and as a director you can elect for the national insurance contributions to be calculated on an annual basis rather than a weekly/monthly basis.

You will have to declare the salary to HMRC either before or on the day you pay it however, as it will be above the LEL for that given month.

As Scalloway says, it will only work if you have no other income (or very little other income).

 

[Newchodge]

If you have noother PAYE income, it is not the most tax efficient way of doing it. You should speak to an accountant.

 

[GillespieBS]

I'm intrigued. What's more tax efficient than paying no corporation, income tax and NIC?

 

[Alan]

I'm intrigued. What's more tax efficient than paying no corporation, income tax and NIC?

Good point, but if you are working full time on your business and earning under the thresholds, you will be able to claim Working Tax Credits or Universal Credits. A form of negative tax.

 

[Newchodge]

You have a personal tax free allowance of 11,500. Anything you pay yourself as salary reduces your corporation tax exposure. If you pay yourself 11,500 you pay no income tax but you reduce your profits by that amount, reducing your corporation tax. You will pay some NI, and the individual circumstances will deem whether it is better to pay up to the NI threshold or up to the income tax threshold.

 

[Scalloway]

£8,164 per annum is the maximum where you get credit for NI contributions but don't pay any.

 

[Mr D]

Good point, but if you are working full time on your business and earning under the thresholds, you will be able to claim Working Tax Credits or Universal Credits. A form of negative tax.

Universal credit in first 12 months is based on income.
After that it would be based on minimum income floor, basically minimum wage for the hours worked. You might indeed earn £5k a year for a 40 hour week but would be treated as though earning about £15k a year because obviously you should be paying minimum wage whether the business can support it or not.

For those transferring from working tax credits the period that minimum income floor doesn't get looked at is just 6 months.

 

[fraser1]

Would I have to withdraw the £5000 payment from a bank account for it to be classed as a salary? Or can the salary be kept in the bank to be used with the business or even taken out at a later date?

 

[Newchodge]

As long as you process the payroll and file RTI you can leave the money as a credit to your Directod Loan Account.

 

[SteveHa]

There would be no RTI requirement for a single payment of £5,000. The floor is the LEL, which is currently £5,880.

 

[Chris Ashdown]

Far better looking at making a far greater profit so you can live a better lifestyle rather than worry about not paying tax

 

[Adam93]

I disagree with not having to file an RTI. The LEL for a month is £486 and therefore, if £5,000 is paid in that month, that month exceeds the LEL. This is the case even for a director that can use the annual LEL limit in a month.

I would submit an RTI anyway, especially if you're after state benefits/social security - if you don't file an RTI HMRC will not know what you're entitled to.

 

[UK Contractor Accountant]

I disagree with not having to file an RTI. The LEL for a month is £486 and therefore, if £5,000 is paid in that month, that month exceeds the LEL.

That's not what the legislation states. CA44 (2016)

Lower Earnings Limit (LEL)
If the director has:
(i) an annual earnings period, do not record the earnings details for NICs purposes until the director’s total earnings for the tax year reach or exceed the annual LEL

(ii) a pro rata annual earnings period, do not record the earnings details for NICs purposes until the total earnings paid to the director since the date of appointment reach or exceed the pro rata annual LEL

Primary Threshold (PT)
If the director has:
• an annual earnings period, no NICs are due from the the director until the director’s total earnings for the tax year exceed the annual PT

• a pro rata annual earnings period, no NICs are due from the director until the total earnings paid to the director since the date of appointment exceed the pro rata annual PT

Secondary Threshold (ST)
If the director has:
•an annual earnings period, no NICs are due from the company until the director’s total earnings for the tax year exceed the annual ST

• a pro rata annual earnings period, no NICs are due from the company until the total earnings paid to the director since the date of appointment exceed the pro rata annual ST

 

[Adam93]

That's legislation about how to calculate NI for a director - not whether or not a PAYE scheme is needed or not.

OP won't even necessarily get a full LEL either unless he has been a director since 06/04/2017.

 

[Scalloway]

From gov.uk

https://www.gov.uk/paye-for-employers

You don’t need to register for PAYE if none of your employees are paid £113 or more a week,

£5,000 is less than £113 a week.

 

[fraser1]

As long as you process the payroll and file RTI you can leave the money as a credit to your Directod Loan Account.

If I use the Director Loan Account for the payment I'll have to pay tax after 9 months. To comply with tax obligations, does the salary need to be transferred to another bank account?

 

[Scalloway]

As far as I understand it the obligation to pay out by 98 moths after the year end only applies to accrued salary that has not gone through RTI. eg when you do the year end accounts you do an accrual to reduce taxable profit.

 

[duggimon]

If I use the Director Loan Account for the payment I'll have to pay tax after 9 months. To comply with tax obligations, does the salary need to be transferred to another bank account?

You've got that wrong, with your salary paid to the DLA the company owes you money. The company can carry on owing you money for as long as you both like, it's only if you owe the company money that there may be an issue.