Accountant has messed up Director's NI - help please on implications!

[Glencky]

Hi all, struggling to find the answers to my questions from Googling or searching this forum, hence the new thread - but I stand to be corrected if I've just searched badly!

Background
* I'm sole director and employee of MyCo. Since setting up, all my contracts have fallen within IR35, so no dividends and just paying myself a full salary each month.
* Due to IR35, I can't build up any money in the company over year-end so I take it all out - paying myself more than I need each month, and I contribute monthly to a personal reserve outside of the company by way of 'war chest' (separate to personal and joint savings)
* As a result, whilst generally my salary is pretty flat, I do vary it sometimes (e.g, when I'm accumulating money in the company despite the high salary, I'll pay myself more to 'get rid of it' out of the company before year end, to avoid an excess in the Deemed Employment Calculation at year end)
* Conversely, this year I chose to take some time off for the first 4 months of the financial year, so I didn't take a salary until Month 5 (living from my 'war chest' held outside of the company)

Against this backdrop, in doing a whole load of filing and record keeping, I noticed an anomaly, pulled the 'dangling thread' and did some manual calculations and realised I may have been paying too little NI since I started taking my salary in Month 5 this year. I guessed that my accountants had been processing my payroll on the 'alternative method' for Director's NI rather than the 'Standard Annual Earnings Period' method
( https://www.gov.uk/employee-directors )
...and contacted them to confirm.

I guessed this might therefore mean I was about to get a nasty surprise at year end with a sudden lump of additional NICs owed, and I wanted to understand the exact impact better in advance, in particular because I'm targeting a near-zero balance in the company at year end and so trying to determine in advance what my final salary will be for the year. I always manage Year End very tightly to ensure I don't pay (even) more tax than I need to by paying Corporation Tax, balancing off with additional pension contributions. But equally, I don't want to end up with insufficient money in the company to pay my NIs!

After a lot of messing around, the accountants have come back and highlighted that so far this year, my payroll has not been processed at all on the director's scheme i.e. I have been treated like a normal employee. I immediately suspected the same probably happened last financial year also (before that, I had different accountants) - I'm waiting for them to confirm.

My accountancy firm is a small band and the actual accountant is on holiday at the moment so I know I won't be able to have a full conversation with him until next week - but believe me, I will be doing so. I already thought, from when I first raised the question, that it was particularly unhelpful that when I had a 4 month break in salary they didn't highlight the difference between the 2 NIC calculation methods and ask me to make a decision as to which one to use (or just switch me to the more appropriate standard method without asking). Now I know they've been processing them on the wrong basis altogether, I'm obviously even less happy.

What I want to know is, what are the implications? I already know there'll be more NICs to pay at the end of this year than I had wanted, and am in the middle of doing my own manual calcs (!) to look at the scale. But is there an issue merely from me not having been flagged as a director in all my HMRC payroll submissions from my accountants for nearly 2 years?

Any other implications I don't know about? It's proved surprisingly hard to find out from Google.

As I say, I'll be having a full conversation with the qualified accountant when he's back from holiday but any light anyone has to shed in the meantime, I'd be grateful.

[northernladuk]

You'll be speaking to a new accountant in the meantime I take it?

[Glencky]

It will depend how things pan out with this one. I'll give them a chance to rectify etc. I've been otherwise much happier with their service than the last one, although this is a fairly major mess-up.

If I change over, I'll do it at my financial year end (which is TYE so not far away) after they've done my accounts and everything else, I know from experience it's not going to help anything to try and sort it in the middle of something like this. It's these guys who need to sort out the mess, not any potential new ones. So we'll see.

[PTP]

As a result, whilst generally my salary is pretty flat, I do vary it sometimes (e.g, when I'm accumulating money in the company despite the high salary, I'll pay myself more to 'get rid of it' out of the company before year end, to avoid an excess in the Deemed Employment Calculation at year end)

What do you mean "when you're accumulating money you'll pay yourself extra to get rid of it"?
From what I've seen, the amount of salary you can pay yourself is "set in stone" - any money that doesn't need to pay your VAT bill needs to instead be used up straightaway by Salary, income tax and NI (apart from a tiny bit of profit to do with 5% expense allowance).
So how are you accumulating much extra? I take it that's not really the VAT that's waiting for the next quarter to be paid?


It sounds like it was the standard method that my accountant used. April's money each year didn't attract any NI because the annual allowance covered it. And the next month or so's NI was still a lot less than the level it reaches by March. So if Month 5 is the first month of 2017/2018 that you've paid yourself a salary, then it sounds right that it would be very low NI under the standard method.

[Maslins]

Implications? If I've understood correctly I think you're making a mountain out of a molehill. Forget about it.

More generally I'd be thinking if you're consistently inside IR35, why are you still working via a Ltd Co? You're pretty much paying all the taxes of an employee with none of the rights/perks. Worst of both worlds.

[Glencky]

@ PTP, in answer to "What do you mean "when you're accumulating money you'll pay yourself extra to get rid of it"?" - I decide what monthly salary to pay myself based on a projection of how much I'm expecting to invoice. Things change over the course of a year and sometimes I'm not paying myself enough for what I've invoiced (e.g. I've taken less holiday than I expected and/or worked extra) so I adjust my salary up to target a zero position at year end. Re: standard method - the first month or so is no NI or almost no NI (depending upon the salary), but after that you get some months with high NI as the whole salary has NI at 13.8% (Eers) / 12% (Ees). Only after you've exhausted that do you then get to the very low NI position on Ees where everything is at 2%.


@ Maslins - There are many advantages to working in a Limited Company despite my contracts so far being inside IR35, thanks. The fact that YOU wouldn't do this because you don't value them, has no relevance to me in my own circumstances.

[ContrataxLtd]

Hi Glencky

If your salary has been processed as an employee rather than under one of the director's methods then there could have been either an underpayment or over payment of NI. Don't just assume that you will have underpaid because it will depend on just what level of salary you have been paying and the fact that you have missed out on 4 months of NI free pay so far. You may also have had the benefit of some of your pay at 2% when it should have been at 12% so the levels of pay here are vital to the calculations.

It should be pretty easy to check you have paid the correct amount of NI for 2016/17, just take your annual salary as per your P60 and calculate the NI you should have paid using the annual thresholds for the year and compare this to what has actually been paid.

The pension part is throwing me a little bit though as the Pension would reduce the salary needed to be paid out from the 'IR35 pot' and wouldn't affect the balance of your 5% allowance out of which the corporation tax would be paid on. It might actually be efficient to be paying some corporation tax ad taking a balance as dividends which is probably tax free if under £5,000 (depending on other income) for this year at least.

Hope this helps

Martin
Contratax Ltd

[MrButton]

@ Maslins - There are many advantages to working in a Limited Company despite my contracts so far being inside IR35, thanks. The fact that YOU wouldn't do this because you don't value them, has no relevance to me in my own circumstances.

What specifically are the advantages? Most of the advice I see around here is just to go umbrella. But keen to get the other side.

[PTP]

@ sketchandsunshine

If I was going to be doing Inside gigs forever then I probably would go brolly if I had the option...but...
I wouldn't have the option because brolly's won't accept contractors from some industries because they see the work as having a high risk of a costly error so don't want to provide the PI

Also, if you're earning good money then it's nice not having yet another middle man potentially holding up your money or going bust

[MrButton]

I wouldn't have the option because brolly's won't accept contractors from some industries because they see the work as having a high risk of a costly error so don't want to provide the PI

Interesting. Never considered a brolly would refuse based on the industry.

What kind of industries we talking about?