Reply to: Pay Salary in advance

[steve101]

Actually I don't have any plans to try to avoid paying tax...and I don't even do the spouse thing either...anyway the reason I was considering this is that my current contract is ending and I wanted to take the opportunity to invest some time in some internal projects...so I could switch from doing work for hire to sell products..or at least start the journey. This would of course lead some uncertainty regarding the inflow of cash.

Would anybody have any other suggestion on how to even out costs/income between two tax years?

[psychocandy]

That's exactly what you're trying to prove you're NOT doing!

Yeh. I agree with you to some extent but then surely most of us are saving tax by doing the old low salary and dividends/ split with spouse idea.

HMRC might not like it (e.g. IR35, settlements legislation) but cant do anything about it in most cases.

And of course, remember the old saying - no one has any moral or legal obligation to pay more tax than they need to....

But, I think this one might be taking it a bit far !!!!!

[Clare@InTouch]

Well there would be a loss of CT. Commercial reason - to save tax? LOL ;-)

That's exactly what you're trying to prove you're NOT doing!

[psychocandy]

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

Well there would be a loss of CT. Commercial reason - to save tax? LOL ;-)

[Greg@CapitalCity]

@ASB, yes I did wonder about that, but I think if £7,488 was paid out on say 30-April-2012 the actual bookkeeping would be;
30-April-2012 - Salary - 624
30-April-2012 - Loan - 6,864

31-May-2012 - Salary - 624
31-May-2012 - Loan balance reduces to 6,240
etc etc

That would get you the CT salary split you are talking about, but the loan balance will cause problems with interest being due (and depending on year end, S455 tax).

I can't see of any other way you could account for an upfront salary payment of £7,488 while also avoiding PAYE on the salary. Well, there is one way;
(1) Pay £7,487 out on 30-April-2012;
(2) Ensure your company is on the annual PAYE scheme;
(3) Pay £1 salary on 31-Mar-2013 - this will reverse back any PAYE calculated as due from the 30-April-12 payment, and because you are on the annual PAYE scheme, you won't have actually paid any PAYE across anyway. Its not very elegant though.....

[ASB]

@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.

Greg, ultimately it will all even out and won't make a jot of difference to what is eventually paid. Only when. But it does give rise to a slightly odd thought to me.

If salary was effectively paid for the year in advance (and I appreciate that is something that could be done even though HMRC might just have a paddy) shouldn't that strictly be treated as an accrual anyway and then dispersed over the period to which it applies? If this were done it would negate the cash flow issues anyway because only x% would be chargeable in year one and 100 -x% in year 2. (that's from the corporate CT perspective of course, not the individuals SA position).

[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.

[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.

[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....

[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?

[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...

[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.

[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!

[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.

[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.