Pay Salary in advance

[Clare@InTouch]

Ah. Of course, you'd have to pay tax initially on the basis of you getting £7500 every month would you?

Exactly. Tax assumes you're going to earn the same every month, so part of that large amount in month 1 would be taxed at 40%. You'd get it back eventually though, so it's a cashflow issue.

[northernladuk]

Exactly. Tax assumes you're going to earn the same every month, so part of that large amount in month 1 would be taxed at 40%. You'd get it back eventually though, so it's a cashflow issue.

And what HMRC think of it when they come knocking surely? I am sure they will argue it is a beneficial loan if they sniff there is even a chance there is anything in it for them.

[psychocandy]

As per my example though, you'd potentially save a fair bit in CT though, so it might be worth the hassle.

Then again what NLUK says is more worrying. It does look well dodgy.

[Clare@InTouch]

And what HMRC think of it when they come knocking surely? I am sure they will argue it is a beneficial loan if they sniff there is even a chance there is anything in it for them.

It depends if they could argue any loss of tax, and if you could argue any commercial reason behind what you did!

[Sockpuppet]

Dont agree. Whether accountant treats salary as pre-payment/deferred expense is another matter of course. In this case, it'd be pointless but if you can allocate the cost of the salary to this years company expenses then surely you;re better off?

Taking my example and making it easier saying my profits (before salary) for each year are exactly £10K. Suppose company stops trading May 2013.


Year end May 2012
Pre-Profit £10K
Salary £7.5K in April 2012
Profit £2.5K = CT of £500

Year end May 2013
Pre-Profit £10K
Salary £7.5K in April 2013.
Profit = £2.5K = CT of £500

OK, but doing it the conventional way:-

Year end May 2012
Pre-profit £10K
Salary of £1250 (2 months april and may)
Profit = £8750 = CT of £1650

Year end May 2013

Pre-Profit £10K
Salary of £7500 (£625 per month, June 2012-May 2013)
Profit = £2500 = CT of £500

EDIT: although in my example you've paid yourself a salary for the whole year April 2013-May 2014 even though the company stopped trading.

Exactly. If you don't make the extra payment in April 2013 then the CT will even out. Your real question here is "if I am closing my company and I pull forward some expenses can I reduce my CT and the example is yes". Your comparing making one level of expenses with another which isnt the same.

If the company doesn't stop trading all you've done is moved some expenses forward a year, if you traded for the next 10 years and stopped trading in Jan or moved onto other employment then you probably wouldn't do this so your final CT tax bill would be higher by the amount you saved in the first year.

[steve101]

Hi All,
I'm amazed to see all the activity this thread generated, thanks to all for taking the time to post.

My angle on this was that a "Salary" is an expense that a business has in order to conduct it's business...and I assumed that it's up to the company how it want's to pay it...as Platypus pointed out...

The reason why other companies pay their employees monthly and retroactively could be because they want to hold on to the money longest possible and... not to mention the dilemma if an employee would leave straight after gotten paid...

Anyway,,,I assumed that it's up to a company how they want to pay their employees as long as Tax is being paid accordingly...then every body should be happy..at least in theory.

One of the reason I came to think of this is that, my current years income/sales for this tax year is know at this point.

It would also reduce my capital gains tax temporarily, as pshychocoandy and Hex pointed out...CT would catch up later though..as I can't put it up on next years expenses...so there is no avoidance..just shuffling around...

So I guess it all boils down to what to if it can be allocated to this years expenses or not...

your accountant may want to treat this salary as an pre payment/deferred expense which won't affect CT at all.

But ultimately if it is allowed I would feel better if I got the cash now when I have money and can take them from this years profits...instead of discovering later that next year is bad year...so I can't pay myself...

[northernladuk]

The reason why other companies pay their employees monthly and retroactively could be because they want to hold on to the money longest possible and... not to mention the dilemma if an employee would leave straight after gotten paid...

No it is because they have to earn it. If you took someone on would you be happy paying them up front before they do the work? I most certainly wouldn't nor does anyone else.

Anyway,,,I assumed that it's up to a company how they want to pay their employees as long as Tax is being paid accordingly...then every body should be happy..at least in theory.

Kind of, you have to keep HMRC happy as well. They don't get happy about many things that make us happy

It would also reduce my capital gains tax temporarily, as pshychocoandy and Hex pointed out...CT would catch up later though..as I can't put it up on next years expenses...so there is no avoidance..just shuffling around...

Althought temporary this would be a benefit to you which is exactly what HMRC will see and call it a loan.
You also say you are shuffling it but you also admit later on that you want paying first incase of a bad year. That is not just shuffling.

So I guess it all boils down to what to if it can be allocated to this years expenses or not...

I would say this appears to be down to what your attitude to risk is. Personally it is too hot for me so I wouldn't

But ultimately if it is allowed I would feel better if I got the cash now when I have money and can take them from this years profits...instead of discovering later that next year is bad year...so I can't pay myself...

Bottom line for me is... Are you doing this to benefit yourself putting money you potentially owe at risk... The answer is yes therefor it will not pass HMRC. Again, it is up to you and your level of risk. Do you think you can get away with it.

BTW I spoke to my accountants (one of the big contractor accoutants) and they wouldn't touch this idea.

Have you thought about taking a directors loan if you want some cash out?

[psychocandy]

Yeh, not spoken to my accountant yet but I've got a feeling they might say no way is it a good idea.

Still not totally got my head around the idea that it just temporarily delays CT rather than saves it. Also, the fact that you've got to cough up tax up front due to large monthly payment and then get it back later is also a lot of hassle.

Dont think I'll bother then....

[Platypus]

Exactly. Tax assumes you're going to earn the same every month, so part of that large amount in month 1 would be taxed at 40%. You'd get it back eventually though, so it's a cashflow issue.

Are you sure, Clare? See my link to the HMRC document earlier which explains how to handle Tax and NI with a yearly pay interval.

Tax does not "assume" you're going to earn the same every month, not according to that document.

[Greg@CapitalCity]

Are you sure, Clare? See my link to the HMRC document earlier which explains how to handle Tax and NI with a yearly pay interval.

Tax does not "assume" you're going to earn the same every month, not according to that document.

@Platypus, most commercial payroll software will have weekly, fortnightly, 4-weekly, or monthly pay runs. Maybe there are some packages that do an annual pay run (ie a salary once per year) but I would say they are few and far between. With that in mind, most commercial software will tax an April 2012 salary payment of 7,488 as if that rate of pay will continue for the rest of the year. And if you leave April 2012 thru to Feb 2013 as 0's, and then put a March 2013 salary payment of £7,488, then it will consider all previous salary payments for the year (which will total 0), and will calculate that no tax is due on that Mar 2013 salary payment.

It really is a bit of a moot point though - if any tax is paid on an annual salary of 7,488, it will get refunded, and as Clare says, all we are really talking about is a cashflow issue.