Payroll

[fattony]

Hi

I'm a new to payroll and although I have the HMRC CD with the P11 calculator this is the first one an naturally have some questions I hope you can answer:

1) When adding the employee the software asks for a 'Scheme Contracted Out Number' is this if I sub contract the employee out?

2) The employee is a director and although the company was formed in July last year this is the first salary from the company, so would I put the start date for this employee as when the company was formed or the leaving date on the P45?

3) Using the P11 calculator I entered the gross pay for the period of 1 month £2416 (£29k pa) and it calculated this (Tax code 647L) :

Gross for NI - £2416
Earnings at the LEL (1a) - £421
Earnings above the LEL up to & including the ET (1b) - £55
Earning above the ET up to & including the UAP (1c) - £1940
Total of employees & employer contributions (1e) - £461.72

I was expecting the P11 calculator to give me the net earnings from the gross earnings, NI number and tax code.

Am I missing something here?

 

[David Richards]

1) When adding the employee the software asks for a 'Scheme Contracted Out Number' is this if I sub contract the employee out?

You'll need to enter a SCON if you have selected the employee's NI category as F (or G/H/K/S/V). An employee could only be on category F if you operate a Contracted-Out Money Purchase (COMPS) pension scheme. If you operate such a scheme, you'll have a SCON. (If you don't have a SCON, then you probably don't have a COMPS scheme and in that case the employee probably shouldn't be on category F.)

2) The employee is a director and although the company was formed in July last year this is the first salary from the company, so would I put the start date for this employee as when the company was formed or the leaving date on the P45?

Director's NI is worked out differently to nomal employees. The relevant date for NI purposes is the date they were appointed a director. (This is used to work out any pro-rata earnings thresholds, where relevant.)

I was expecting the P11 calculator to give me the net earnings from the gross earnings, NI number and tax code.

Am I missing something here?

It's been a while since I looked the HMRC CD. But basically it's a collection of tools that give you the figures to record on a P11 form, instead of working them out manually. It's not payroll program.

 

[fattony]

Thanks I'm having a look at 12 pay which is linked to kashflow and I just wanted to check as the net figure seems a little high:

Tax code 647L
Gross Pay - £2416
Tax - £267.20
NI - £213.47

Net Pay £1936

I was expecting the net figure to be around £1800 ish

The only thing which could throw it out is the leaving date on the P45 is March 2010 and the joining date I'm entering is May 2010 could that be why the payment is slightly higher?

 

[David Richards]

Tax code 647L
Gross Pay - £2416
Tax - £267.20
NI - £213.47

Net Pay £1936

I was expecting the net figure to be around £1800 ish

£267.20 looks like the correct amount of tax for a payment in tax month 2, for someone on 647L who earned nothing in tax month 1. (Remember tax is generally cumulative; this employee has two months of tax allowances but only one month of pay.)

For a director, the NI would normally be zero, as they haven't yet earned enough to reach the annual earnings threshold. £213.40 is the correct amount for a monthly-pad employee on category A. You can work out a director's NI using the same method as a normal employee if you wish, but you'll need to recalculate it using the director's method for tax month 12 - which can lead to large balancing payment or refund of NI.

 

[fattony]

Thats correct there was no salary in month 1 April, I'm a little confused with the NI being 0, the director is not taking any dividends at the moment, he took one in April hence no salary (we'll look at how much profit we're expecting before another dividend is paid) so I was treating it simply as an employee.

Could you explain a little more on 'as they haven't yet earned enough to reach the annual earnings threshold' Surely a normal employee hasn't either?

There is a section in 12 pay which says ignore director, if unticked the NI is 0 as you said but I currently have this ticked.

Lastly how much do I need to allow as an employer contribution and when is this paid to HMRC?

Thanks

 

[David Richards]

Thats correct there was no salary in month 1 April, I'm a little confused with the NI being 0, the director is not taking any dividends at the moment, he took one in April hence no salary (we'll look at how much profit we're expecting before another dividend is paid) so I was treating it simply as an employee.

Dividends are not relvant to PAYE or NI. The person is either a director or not. If they are a director then different rules apply to calculating NI than for normal employees. There's a whole booklet about it, but it's rather dull.

Could you explain a little more on 'as they haven't yet earned enough to reach the annual earnings threshold' Surely a normal employee hasn't either?

Normal monthly-paid employees have an earnings threshold of £476 - they only pay NI on NIable earnings above this level. Director's don't have a monthly earnings threshold, they have an annual earnings threshold of £5715. So a director only pays NI on NIable earnings above that.

Directors who get a regular monthly salary sometime prefer to have their NI worked on the same basis as an employee. But it has to be recalculated at the end of the year on the director's basis. If the director doesn't get a regualr monthly salary (e.g. skipping months or taking irregular amounts or large bonuses), then this recalculation can cause a large payment or refund at the end of the year. It's generally easier to use the director's basis all year, so there are no nasty surprises at the end of the year.

There is a section in 12 pay which says ignore director, if unticked the NI is 0 as you said but I currently have this ticked.

I know how to use our own payroll software, but I don't know how to use 12Pay. However Tom from 12Pay is a friendly chap and I'm sure he can help you out.

Lastly how much do I need to allow as an employer contribution and when is this paid to HMRC?

You quoted the total NI figure in your first post - the employer's portion is the difference between the employee's part and the total. Your payroll software will show this. (But bear in mind, the figure you quoted was calculcated on the employee's basis. On the director's basis, the employer's share would also be zero at this time.)

The payment due date depends on whether you pay monthly or quarterly and how you choose to pay. Full details are on the HMRC website.

 

[Tom McClelland]

There is a section in 12 pay which says ignore director, if unticked the NI is 0 as you said but I currently have this ticked.

Lastly how much do I need to allow as an employer contribution and when is this paid to HMRC?

Thanks

Many thanks to David Richards for his excellent explanations. Let me explain about "Ignore Director".

Some directors prefer to have their payments treated as if they were regular employees. This "flattens" their contributions to broadly the same amount each month if their income is consistent, so there is less likely to be an unpleasant surprise later in the year. You are allowed to do this if the director (a) agrees to it and (b) has regular income above the Lower Earnings Limit. To achieve this we have the "Ignore Director" tickbox in 12Pay, which then only applies directors rules for the last payment of the PAYE year.

Employer's NI contributions can be seen on payslips and on the employee's current period tab (the tab with the green tick) and on many of the reports available from the system. You can also see the total owed to HMRC on the P32 report, which is produced automatically whenever a payroll is rolled past the 5th of the month. (ie every time you advance a monthly payroll, and when required if you advance a weekly payroll). P32 can also be produced on demand from the employer form, but it only includes completed pay periods, so provisional figures from the currently active payroll wouldn't show yet as these haven't been finalised and therefore shouldn't be used to show liability to HMRC.

 

[alison640]

Because the start date is during the tax year i.e., May, month 2, should you not apply a wk/month 1 tax code, which is not cumulative. Check with your local tax office first, if it is supposed to be wk1/m1 this does affect the net pay.

Basic rule of thumb is every PAYE month ends on the 5th of every month, and due for payment approx 19th of every month, but there are options to pay quarterly, months 3, 6, 9 and 12 - 5 July, 5 October, 5 January, 5 April.

 

[Tom McClelland]

Because the start date is during the tax year i.e., May, month 2, should you not apply a wk/month 1 tax code, which is not cumulative. Check with your local tax office first, if it is supposed to be wk1/m1 this does affect the net pay.

No. You use the tax code on the P45, or follow the instructions on the P46 if the employee cannot provide a P45. What current month it is has little to do with whether or not you should give new starters a w1/m1 tax code.

• If employee provides P45 with w1/m1 tax code and the employee left their previous employer during the current tax year then use a w1/m1 tax code.
• If employee without P45 ticks P46 box B then use a w1/m1 tax code.
• In all other cases use cumulative code for new starter.

 

[alison640]

Sorry, I was under the impression that the P45 had expired, July last year was mentioned, can you clarify the leaving date on the P45?

Sorry if I caused any confusion

 

[Tom McClelland]

Sorry, I was under the impression that the P45 had expired, July last year was mentioned, can you clarify the leaving date on the P45?

Sorry if I caused any confusion

If the leaving date on the P45 was last year then you should definitely use cumulative tax code, even if the P45 specifies w1/m1, unless the employee started after 25 May 2010, which I don't think is the case here. The leaving date on the P45 would have to be older than 6/4/2009 to suggest 647L/W1.

 

[fattony]

the leaving date from previous employment was March 2010 but the company was formed in July 2009, a dividend was paid in April 2010 while we were registering as an employer and I'm sorting wages for May - my partner never gave me the P45 until this weekend.

Thanks Tom I think you've cleared a bit more up for me

 

[fattony]

I've been thinking about the employer national insurance contribution and will it continue to be 248 a month for 12 months, 3k a year is a lot of money, maybe i would be better leaving it as 0 for director and sticking some aside each month, would the company still need to contribute on a directors contribution?

 

[Tom McClelland]

Directors NI is calculated cumulatively on total pay to date, comparing with annual NI limits. So by month 3 you'd be paying NI as a director, and by month 4 you'd actually be paying more per month (to make up the non payments in months 1 and 2). By month 12 you'd have paid almost exactly the same in total.

This applies equally to employers NI.

 

[fattony]

Thanks, I guess it just goes to show the benefits of a dividend!