Directors and PAYE


Satyajit Ray

1.0 Basics

• Directors are employees.

• Directors are not entitled to National living/minimum wage.

• Directors usually register for Self-assessment (SA). They will need to complete employment pages of the return.

• Two methods for computing National Insurance Contributions (NICs) for directors:

a) Cumulative ; or

b) Regular employee method

Please note both method give similar results at the end of the tax year.

1.1 Bonus facts

• Directors can register for `Annual Scheme` who are paid on an annual basis to avoid sending (Employee Payment Summary) EPSs every month.

Dividends can only be paid when there are sufficient profits made in the business this could be current year profits or brought forward reserves.

• NIC is not due on Dividends.

Record keeping: PAYE records needs to be kept for 3 years.

• Its advisable to keep records for 7 years.

2.0 Paying directors without running payroll

We can only put £120 (LEL : tax year 20-21) x 52 = £6,240 as director’s wages.

“as you do not need to register for PAYE if none of your employees are paid £120 or more a week”

See link below:
https://www.gov.uk/paye-for-employers

3.0 Optimum salary for directors
If the employer is eligible for Employment Allowance , which will happen in case there are two directors husband and wife or two friends both directors in the company. We should pay them a salary equal to the personal allowance.

In other cases uptill the NIC secondary threshold.

Maths on the above:

Suppose A earns a salary of £12,500 (tax year 20-21), he pays no tax but NIC @ 12 % above primary threshold (£9,500). Thus he pays 12% on £3,000 i.e. £360.

But as the company does not pay Employer NIC, company can save 19% on £3,000 i.e. £570 , difference £210 saved.

For two directors saving are £210 x 2 = £420 per annum.

4.0 Minimum Salary for State Pension
Any individual (including a director) earning between £120 (LEL) and £183 (PT) a week, is treated as having been paid the contributions to protect your National Insurance record.

  • Employee starts paying NIC on salaries over PT and
  • Employer starts paying NIC on salaries over ST

See link below:
https://www.gov.uk/national-insurance

5.0 Method of payment of directors salaries
Usually Director’s salary is credited in their account via a Journal entry. This is alright when Director Loan Account is in Credit. In case Director Loan Account is in debit i.e. monies have already been withdrawn, it would be necessary to actually pay the salary, which director could transfer back to the company.

6.0 Interest on directors loans
If a director has given loan to his company and charges interest on it, this interest income will be covered by Personal savings allowance.

7.0 Auto enrollment
As per Pension regulator “organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).

The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let us know that they’re not an employer.”

See link below:
Pension Regulator website

UK resident – selling a overseas property

A friend asked me how capital gain on a overseas property is calculated. I thought I will give an example enumerated by HMRC in its guidance.

In 1983, Ms A who is both resident and domiciled in the United Kingdom buys a property overseas for foreign currency, which she acquired for £50,000 on the date of purchase of the property (that is, there was no gain or loss on the acquisition and disposal of the currency). In 1986-87 she sells the property for 3,000,000 units of the foreign currency at a time when the exchange rate is 40 to £1. The sterling equivalent of the currency so obtained is therefore £75,000.

The chargeable gain (subject to expenses) is £75,000 less £50,000 equals £25,000

Reference: HMRC Manuals – CG78408

Starting rate of tax for savings income 2015-16

From 6 April 2015 the starting rate of tax for savings income (such as bank or building society interest) will be reduced from 10% to 0% per cent and the maximum amount of taxable savings income that can be eligible for this starting rate will be increased from £2,880 to £5,000

more details:

http://www.ion.icaew.com/TaxFaculty/post/Starting-rate-of-tax-for-savings-income