HMRC saying I have NI to pay at <£5000, but I'm on Directors cumulative method?

[softwaredever]

Hi everyone,

Just called HMRC about this but they said they can only answer these kind of queries on weekdays, which is when I'm working, so if anyone has any insight, would be very grateful.

I set up an LTD a few months ago, and currently am doing my accounting myself as I wanted to learn how it all works and my income / expenses are very simple. I've used HMRC's Basic PAYE tools to record salary payments to myself as director, which is £1632 per month since November 2017 (aiming to earn £8164 in salary this tax year to stay under the NI threshold).

I'm calculating NI using director's cumulative method, which I thought meant I wouldn't have to pay it until I hit the threshold of £8164 pa (i.e. never). However today when I entered the salary for January into HMRC Basic PAYE tools, the calculation said I have £97.68 to pay in NI, despite the fact that I've only earned £4896 (including this payment that I haven't made yet) so far this tax year. Does anyone know why this is?

Some more info:

- My limited company is just me as sole directory, and I'm listed as an (director) employee paying NI using director's cumulative method.
- I have no previous income for the tax year
- I've made two previous salary payments to myself of £1632, and neither of these two previous payments had any NI deduction (though they did have student loan deduction, which I expected)
- I paid these previous salary payments (Nov and Dec) in Jan, as couldn't get PAYE setup before then, I wonder if this is relevant, like it looks like I'm earning double what I am? Though for director's cumulative it shouldn't matter. However under the 'Employee year to date summary' it says I've already (at total earnings of £3264) earned £326 above the lower earnings limit (which it says is £2938), which shouldn't kick in until £5580.
- Perhaps you only get half of the £8164 NI limit if you only work for half the year?

[Lance]

The PAYE tool is making assumptions about your income. That’s what PAYE is.

Get an accountant FFS. If you want to Keane how it works do it under professional guidance rather than screwing it up and making some expensive mistakes.

[softwaredever]

The PAYE tool is making assumptions about your income. That’s what PAYE is.

Get an accountant FFS. If you want to Keane how it works do it under professional guidance rather than screwing it up and making some expensive mistakes.

Yep I may have to...it's complex stuff! As you say, this NI thing must be because I'm only working for half the year and I guess NI isn't calculated on a total annual basis but on the period I've been working for. This confirmed it for me, if I put in that I've been working for the entire year I get the full allowance.

So I may indeed need to find an accountant to tell me whether there's a way I can get the full year's allowance or whether I have to live with a lower threshold...

[MrButton]

+1 for getting an accountant.

[Jessica@WhiteFieldTax]

- Perhaps you only get half of the £8164 NI limit if you only work for half the year?

Correct

https://www.gov.uk/government/upload...CA44_2014_.pdf

24 Pro rata annual earnings period
Directors first appointed during the tax year have a pro rata annual earnings period for the remainder of that tax year.
You need to work out the:
• number of weeks in the pro rata period
• pro rata annual LEL
• pro rata annual PT
• pro rata annual ST
• pro rata annual UAP
• pro rata annual UEL.
See the ‘Quick guide to pro rata annual earnings periods’ on page 31.

[softwaredever]

Correct

https://www.gov.uk/government/upload...CA44_2014_.pdf

Great, thank you for clarifying this.

[northernladuk]

Don't do your own accounts. You can still learn it with an accountant.

[ASB]

The printed nI for directors leaflet does explain exactly how to operate ni for directors. Including the various different methods can be used and pay period and pro-rating (the latter being what you tripped over).

The current version is here:

https://www.gov.uk/government/public...pany-directors

There is one other issue that can potentially become relevant. That is exceeding maximum that would be payable by an employee (I forget how you actually resolve this specific mess). It does seem unlikely that you will overpay from yoir description of the circumstances.

Edit. Managed to miss the earlier answer.

[drumtochty]

Yes a mistake that you made but in my experience most accountants I know will not point out that fact until you get the bill. My accountant in those days did not point that out and I had to research it myself.

I would not see that one issue as a reason to get an accountant as a friend with a Limited company who uses an accountant was not told to register for PAYE and in the first year paid £750 corporation tax on a £3,000 dividend, he had not earned that much in his first year but if he had done as I had advised and his accountant poo poo'ed, he could have paid himself £3,750 in wages via PAYE and not paid a penny tax.

Originally after taking early retirement in May a good number or years ago, I got a contract job in following January and only got 3/12ths of the NI Primary Threshold as a director due to my company had not been formed in the first 9 months of the PAYE financial year.

Looking back if I had know that, I should have registered the company on the 6th of April and informed HMRC that the company was dormant until the January and I would have got the full years £5,740 Primary Threshold at the time. I had always intended to do contract work via a limited company after I left my staff job.

It had two issues for us as I got a years NI from my previous staff job but contracted out, therefore we both would have got an extra years Second state pension and my good lady could have used more of her personal allowance.