Director paying £624 per month incuring NIC charges?

axl2derv
axl2derv Registered Posts: 172 ? ? ?
Evening

I have been working for my Ltd company since October and have been paying myself £624 per month from October. I have just ran my payrolls up until March 31st paying the same value and come March, I have incurred both E'ee and E'er NIC on my salary.

Can anybody explain how this has happened. I know NIC works differently for directors but I was under the impression that paying £624 per month would not incur any NIC.

Comments

  • ExcelAnt
    ExcelAnt Registered Posts: 80 ? ? ?
    Hiya, This depends on several factors.

    What system are you using for payroll? What is your tax code? what are your other earnings to date prior to these payrolls? Have you selected cumulative or non cumulative director pay method?

    All of these will affect what is being calculated (the system won't that's just for info for whoever ends up answering the question :)

    The 624 figure is derived from an annual salary of 7488 being under the 8105 personal allowance for PAYE. NIC should not be payable also as it does not break the PT for NIC payable
    http://www.hmrc.gov.uk/paye/rates-thresholds.htm

    I can only guess that you are using the HMRC PAYE tools, which although useful are....lacking in complexity, that or the above elements are affecting the payroll you are running.
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    What payroll software are you using? I agree that £624 per month should not incur any NICs, but for directors, especially in the first year, it can be much more complicated than that! I've had a couple of instances using Sage Payroll where director's NICs has gone to pot and it ended up being to do with the date the employee became a director. Sage seems to default to the posting date as being the date the directorship began (for the first time you start processing) and often this needs changing. This is because in the first year the NIC thresholds are apportioned for the part of the year the employee has been a director.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    Hi

    My tax code is 810L and I earned over £10k from my previous employment before becoming a director. I am using both Sage Payroll 2010 and PAYE tools - Both give different figures. I believe I am using the cumulative pay method - is this wrong?

    Obviously I don't want to incur any NIC so any help would be greatly appreciated.
  • ExcelAnt
    ExcelAnt Registered Posts: 80 ? ? ?
    Im Out of my depth now :) but certainly the PAYE tools are only effective if you have basic employees, Director pay gets tricky.

    i'd say cumulative should reduce your PAYE but will increase the NIC, non cumulative will do the opposite.
    However not 100%, Rozzi hopefully can clarify :)
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    ExcelAnt wrote: »
    Rozzi hopefully can clarify :)

    Thanks for the vote of confidence but directors' NICs really bake my noodle (to quote from a well known forum member!).

    axl2derv - the PAYE figures should be the same regardless of which system you use as tax is tax and shouldn't get complicated just cos you're now a director. PAYE is always cumulative when you're not on a week 1/month 1 code (which you don't appear to be).

    The difference in NIC figures sounds like it's all to do with pro-rating the annual threshold. Whether you use the cumulative or non-cumulative method for NICs, it should still work out the same in total, as non-cumulative recalculates on a cumulative basis in the final pay period anyway. I *think* the issue here could be exactly when you became a director - were you a director for the whole of October? If not, I don't think you can pay £624 for October without incurring NICs - it needs to be pro-rated (e.g. director for only half of October, only pay £312).

    I've just tried to look on the HMRC website for any further guidance but can't find a thing on there about directors' NICs!!!
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    Finally found it! Here is the link to the HMRC helpbook on directors' NICs:

    http://www.hmrc.gov.uk/nitables/ca44.pdf

    If you go to page 35 of the booklet and look up exactly which week you became a director, it tells you how much you can earn in the remainder of the year before becoming liable to NICs.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    I left employment on 31/07/12 and became a director on 13/09/2012. I didn't start paying myself until the end of October.

    To be fair, the NIC for both E'ee and E'er is £68 and the PAYE reclaim is £62 so the net effect is a payment of £6. Hopefully I won't incur any next tax year.

    Just to note that I tried using a program called 12pay payroll and got the same figure as PAYE tools so it must be right for me for this year.
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    According to the table in my link above, if you started as a director on 13th September, you can earn £4,320 in the remainder of the year before being liable to NICs. £624 per month from October = 624 x 6 = £3,744 so I can't see how any NICs are due. Is the date of directorship definitely right in your program?

    Alternatively if you just reduce your salary, you shouldn't then be liable to NICs. You should also get a bigger PAYE refund which will offset the extra Corp Tax due :) Were you paid at all in August or September? If not, I would have expected you'd receive a higher tax rebate than £62 as you would have another £1,350 of tax free allowance available.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    I actually got my dates wrong.

    I left employment on 31/08/12 and not 31/07/12. My P45 states I was paid up until Month 6 so I have paid myself from Month 7 onwards. I had my director date set at 22/10/12 and not 13/09/12. I have since corrected and now have incurred no NIC.

    Does anybody know what the figure is increasing to for next tax year from £624 as I get it at £641.33?

    If the personal allowance is £9,440 and a director pays themselves £7,696 (£641.33 x 12), is there anyway to get the additional £1,744 out of the company without incurring NIC? I would have said loan interest but a director can't charge that on a DLA.

    Thanks for the help.
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    Glad you got it sorted, thanks for the update.

    I haven't looked into next year's allowances yet (I can only just remember what this year's are!).

    I don't think there is anyway of "getting" the rest of the allowance, but it could come in useful if you have other income such as bank interest (can get the tax back!) or rental income.

    I have seen on other similar threads on here that some people prefer to take a slightly higher salary at the level where Employer's NICs are payable but not Employee's. You are then paying 13.8% to save 20% Corp Tax. And the Eer NICs themselves are tax deductible, so you save a bit more. Only works if you personally don't have to pay the 20% income tax though, and can be a bit of a hassle having to make the small quarterly payments to HMRC.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    Thanks Rozzi.

    I've just done some calculations and the most tax efficient method would be to pay £7,748 next year paying £7.18 E'er NIC. The difference is only £5 though between that and paying £7,696 paying no NIC.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    Just thought...

    Could I invoice my Ltd company through my sole trader business for £1,744 (as a consultant)? The result being less CT and a nil profit in the sole trader business if I take the £1,744 as salary. What NIC would be due through the sole trader business?
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    Hmm, not sure about that, I'm afraid, can't say I've ever seen it done.
  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037
    axl2derv wrote: »
    Just thought...

    Could I invoice my Ltd company through my sole trader business for £1,744 (as a consultant)? The result being less CT and a nil profit in the sole trader business if I take the £1,744 as salary. What NIC would be due through the sole trader business?

    I haven't read the entire thread but surely if your company pays your sole trade business £1,744 your sole trade business would have made £1,744 of profit?

    Also, what do you mean when you say "if I take the £1,744 as a salary"? A sole trader can't employ himself (probably because the business and the trader are not separate legal entities)!!!!

    Re: NIC, if you only make £1,744 you will not have to pay any NIC. Above £5,595 you'll have to pay class 2 nic at 2.65/week and above 7,605 you'll have to pay class 4 nic @ 9%.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    Sorry Reader, probably didn't present that post in the best way. I will try again.

    What I am asking is...

    Can I invoice my Ltd Company £1,744 next tax year through my sole trader business? This will reduce my CT bill and allow me to take the remainder of my personal allowance (using £7,696 of it through PAYE in the Ltd co) without incurring income tax and class 2 and 4 NI.
  • Rozzi Rainbow
    Rozzi Rainbow Registered Posts: 465
    I've been thinking about this and think the issue would be proving your consultancy (sole trader) work is genuinely self employment with your Ltd Co, and completely separate from your employed work as a director. Otherwise it could be seen as bogus self employment purely to avoid paying NICs.

    I would be interested to know if anyone has actually done this, or anything similar.
  • axl2derv
    axl2derv Registered Posts: 172 ? ? ?
    The service could be for the company's website and marketing activities which is a legitimate cost. I do my own web developing yet that has nothing to do with my accountancy business activities. If I didn't do it myself then I would have to hire an external provider.

    I think this makes sense. What do you think?
  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037
    axl2derv wrote: »
    Sorry Reader, probably didn't present that post in the best way. I will try again.

    What I am asking is...

    Can I invoice my Ltd Company £1,744 next tax year through my sole trader business? This will reduce my CT bill and allow me to take the remainder of my personal allowance (using £7,696 of it through PAYE in the Ltd co) without incurring income tax and class 2 and 4 NI.

    Oh, I see...................

    Technically I think you would be allowed to do this (assuming that the £1,744 is a reasonable/fair value for the work done). Assuming that the £1,744 is a fair commercial valuation of the sole trade work you are doing it seems like quite a good idea.

    HMRC could challenge this however as long as you're declaring the £1,744 on you tax return and the £1,744 is a reasonable valuation I don't think they can really do anything.

    Although you might want to value your work at £1,500 (rather than £1,744 which is obviously a valuation that reflects the balance of your personal allowance rather than your commercial work).
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