Treatment of salary in the accounts

Gillian Registered Posts: 17 Dedicated contributor ? ? ?
Hi there

I have a situation with a Director we have just taken on.

We are currently doing his annual accounts, and are having a debate, and Ive had a bit of a mental block on this.

Client took 2 payments from his business which he said was salary, but he took them early on in the tax year. A total of £6000 was taken in June and September. He was told by his previous advisor that he could take up to £7068 for the 2011/2012 tax year without NI or tax becoming due. He has taken £6000 in the whole of the tax year 2011/2012. There was no payroll information.

I thought that if he took a salary at his time would mean that he would owe tax. Am I correct in this? If so then the salary would not be £6000 and there would/should be HMRC tax on the books.

He was also told that he could apply this salary to his accounts for the year ending 31/08/2011.

Technically he phyically took the second part of the salary after the year end so can we treat this as being paid in the year ended 31/08/2011. I really don't think so .

Personally I think its a bit messy but just wanted to see how others would treat this.


  • groundy
    groundy Registered Posts: 495
    Prepare a monthly salary for the year, file P35 - Credit directors loan with Net salary. Debit directors loan with cash withdrawn
  • Gillian
    Gillian Registered Posts: 17 Dedicated contributor ? ? ?
    Hi Groundy

    thanks for this, sort of the lines we were thinking of.

    but wanted to check that it is ok to prepare a payroll for each month even though he took the money in Jun and Sept.
    and is shown as such on his bank statements. (although he did take it as a cheque).

    Doing the payroll monthly the gross is the same as the net, so no HMRC obligations.
    As he cancelled his PAYE in march this year the £6000 /10 = £600 per month.
    (I will need to reopen the PAYE to get the P35 filed but no major issue)

    So as at 31 August then he would have taken £3000 under the payroll (and also he took £3000 exactly in June). This means that Salary would be £3000 at the end of August. and his DLA has nothing in it. (there are no other items in his DLA). Is this correct?

    So the next question is can I use the other £3000 he took in september in these accounts, as the other accountant advised. I really don't think so but maybe there is a way. He technically took it in September so doesn't enter the DLA until then september, and was not in that period so would fall in the accounts for the YE 2012 surely. Unless I am missing something.

    If I do it as salary for up to YE31/08/2011 then he will have earnt £6000 in 5 months to 31/08/2011, he will have personally gone over the thresholds so has tax to pay.(and he didnt pay it would have been around £570 if all the money was taken as a salary before August - so there may be a penalty there as it would have been payable around Oct 2011). As there was no other pay or income in that year at all he would have got this back if he had paid it. - Am I right in this (penalty may not apply but it hasnt be paid and is over 8 months late- ( he already has a penalty for not submitting a nil annual return for April 2011). The P35 in this case would show tax due and having should have been paid. I think I may be missing something here.

    If the all the salary is taken in year to 31/08/2011 it will reduce his Corp Tax by a further £600 but not sure about all the other possible problems and I feel it is not technically correct.

    The company didn't actually do anything this year so the accounts so far for this year will simply have the salary in it (if there is no way to put the £3000 paid after August) and no income and no expenses (which also may be a bit wierd) - personally I think he should take the second £3000 he paid in august as a dividend as there is enough equity to do so.

    going round in circles with myself and having mental blocks any thoughts would be appreciated
  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037
    May be useful to prepare a wages book, i.e. list out gross, paye, e'ee nic, net, e'er nic (horizontally) for the 12 months Sep-10 to Aug-11 (vertically) and then post the sub-totals into the accounts (net pay goes to the CR side of the director's loan account).

    At least then, if hmrc ask you to justify amounts reported as directors renumeration and amounts credited to the director's current account you'll have a schedule ready.

    You should be able to prepare the wages book from the 12 monthly payroll summaries for the period Sep-10 to Aug-11.

    You can then DR the director's loan account with the £3,000 in the 2012 accounts next year.
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