Paying myself one lump sum in a year

[BasilF]

I established my Ltd company on 7th May 2019. I have earned circa £40k, but I haven't paid myself a salary from my business yet, because I received income as an employee in 2019 so I had already used up my allowances.

I plan to pay myself in the coming tax year, post 6th April. To reduce my corporation tax bill for my accounting period (presume to 7th May 2020) I plan to pay myself a lump sum up to the NI threshold, which I think will be £8788 in 20/21, which I understand means I wont need to pay NI, but I will earn pension credits.

Three questions:
1. Am I right in thinking this will reduce my corporation tax bill?
2. Is this allowable under HMRC rules?
3. What PAYE software should I use to do this?

Thank you

 

[Scalloway]

1. Yes
2. Yes
3. HMRC have a list of software here. Not all PAYE software supports annual payrolls though.

https://www.gov.uk/payroll-software/free-software

 

[SteveHa]

You'll hit a bit of an issue paying the whole year in the month ended 7 May. Because PAYE is calculated cumulatively, you will only have 1 (maybe 2) month's of tax-free pay to set against your salary, meaning that some tax will be payable.

You'll then have to process a NIL payslips in each subsequent month to generate the refund.

The earliest that you could process the payroll and not have the inconvenience of tax to pay and reclaim (assuming a standard 1250L tax code) is month 9 (December).

NI is also cumulative for a director, but doesn't work on tax months in the same way, so will be wholly mitigated straight away.

 

[A K]

Hi, I would like to do the same thing but pay a family member who isn't a director. I understand employee taxes are calculated yearly, so even if you make an over payment in taxes you will be refunded after tax year end (so no big deal).

However what about employer taxes? Paying someone 12,500 in one month may not mean any extra taxes for employee but what about the employer? Wont the employer have to pay more NI contribution then compared to if that same amount was paid to the employee in 12 monthly instalments?

Any advice?

 

[Scalloway]

Both the employee and the employer will pay considerably extra NI if the payment is done in one lump sum. Go to page 178 in this document to find the calculation.

https://assets.publishing.service.g...nce_contributions_Tables_A__H__J__M_and_Z.pdf

 

[Newchodge]

Only directors benefit from salary paid once a year. Non-director employees should be paid monthly. or 4-weekly. or fortnightly. or weekly. But never annually.

 

[SteveHa]

Only directors benefit from salary paid once a year. Non-director employees should be paid monthly. or 4-weekly. or fortnightly. or weekly. But never annually.

Unless they are of an age where they no longer pay NI anyway.