Reply to: PAYE on bonus - is this correct?

[northernladuk]

Now that is resolved are you gonna change your name to 'Failed IR35 Avoider' or summat now?

[IR35 Avoider]

It looks like this is resolved now. There were misunderstandings on both sides. They thought I was going to cease my directorship before the end of the tax year. I thought they were using a monthly earnings period for NI, but NI is not the issue, their figures for that are the same as mine.

They have discussed with HMRC, and apparently, for income tax, you are supposed to specify your period in advance, and if you specified monthly, then once a monthly payslip has been produced, you cannot change from using a monthly period. This is not new, however before RTI HMRC would not have known if you'd changed your mind in the first quarter of the tax year, because salary was only reported quarterly.

However tax was never the issue, as with tax you can reclaim any amounts that have been overpaid. It's NI where if you don't have an annual earnings period then the amount of tax you pay on the same amount of income can go up or down depending on how the payments are distributed.

So I could just pay bigger than expected deductions and reclaim the income tax later.

However there is an alternate solution, and that is simply to put an entry in the accounts now for the salary, but only actually pay it at a later date. If I paid it in equal monthly instalments over the rest of the tax year, or all in March 2014, there would be no over-deduction of income tax and no need to reclaim. Apparently this is allowable from an accounting point of view since the accrual relates to work done during the year in question. There is a HMRC rule that to be deductible the related salary has to be actually paid before the corporation tax return is filed and before the company accounts are filed. That is not a problem if the salary is taken by the end of March 2014.

[ASB]

I see why you want to do it.

I believe its fine. The thing to be cautious of will be if shareholders funds happen to go negative as a result. There is a trading while insolvent argument that could then be made.

Ultimately the bonus will mean you make a trading loss in one year. Big deal happens all the time. If you are then able to carry back the loss against previous ct so be it. You will need to check carry back is still available. It would get complex if it had to be carry forward.

[Sockpuppet]

Ah yes....I see....hmm......very good carry on.




Like **** do I understand how that all works

[IR35 Avoider]

Sorry for the delay getting back to the thread, been off-line all day and probably will be tomorrow.

Thanks to everyone who responded, especially Jessica and Martin at Nixon Willams.

Fascinating. That makes no sense at all on first reading...If you're IR35 caught, you have no flexibility on what you pay yourself, it's 95% of gross income less some allowable expenses as salary. There will never be enough profit to make CT, dividends or cash retention a consideration.

So clearly I missed something and will have another read...

Jessica has explained the issue. Essentially, after paying my accountant, over the short life of this company, the remainder of the 5% will amount to an estimated £9000, however in the first year (2011) I had 8K profit and in the second year (2012) 6K profit, so I've already paid corporation tax on 5K more than the actual profit I'm going to have had across all years. If I don't make a loss this year so I can reclaim 2012 Corporation tax, then I will have paid tax on profit I (ultimately) didn't have.

So far from tax avoiding with this bonus, I'm trying to avoid paying tax twice on the same money (once as company profit and again as salary.)

Or something like that. Posting quickly because short of time. All figures may be wrong because I don't have time to get the right ones.

[ASB]

So what is stopping us all paying ourselves our £7k salary in the first month of the year, or even the end of the previous tax year so we can get some interest owed on it?

Nothing. But it is unlikely to achieve your objective.

I'm assuming you mean pay 7k in April and nothing for the rest of the year?

Perfectly valid. But, the issue would be that tax and NI would need to be paid. Unless you had agreed an annual pay period. Subsequent payments would then be this tax slowly being rebated - or it all rebated in one lump as a result of the SATR being filed.

Of course there are NI implications too, what the result of that would be depends upon the method used to calculate directors NI, and indeed whether the employee in question was a director. The result of this would in fact be that NI would likely be overpaid- depending upon the calculation method used, but not necessarily a disaster since they can be reclaimed through a complex process.

The bottom line is that people do get paid irregular amounts at irregular periods, the system copes with it by having a bit of a heads up as a result of the SATR and also by the fact that it works for most people most of the time.

[northernladuk]

There is no avoidance. It may overall affect when tax is paid, but not how much.

So what is stopping us all paying ourselves our £7k salary in the first month of the year, or even the end of the previous tax year so we can get some interest owed on it?

[ASB]

There is no avoidance. It may overall affect when tax is paid, but not how much.

From the personal point of view 13k is paid in June. There will be some to comeback if there are no further payments during the tax year in question - because the allowances are not being used. It will resolve itself when the SATR is filed.

It is theoretically possible to make in year claims and get any rebate more quickly.

[northernladuk]

Would I be wrong in suggesting that doing this you are creating an artificial situation with the sole purpose of avoiding tax which puts it firmly in to the aggressive tax avoidance arena that the gov is clamping down on? And how can paying yourself up front be Pay As You Earn or does having retained profit cover this?

[Jessica@WhiteFieldTax]

Fascinating. That makes no sense at all on first reading...If you're IR35 caught, you have no flexibility on what you pay yourself, it's 95% of gross income less some allowable expenses as salary. There will never be enough profit to make CT, dividends or cash retention a consideration.

So clearly I missed something and will have another read...

Your reasoning works where the tax year and company financial year are aligned.

Where they are not then you get flexibility in so far as the IR35 calculation is over the whole tax year, whereas the CT deduction is against company accounting periods. This can give rise to useful planning opportunities and horrid bear traps.

[Martin at NixonWilliams]

I paid £641.33 salary in April and May. I want to pay aprox. £23,000 in June. This will (probably) be my last salary payment for my 2013/2014 year, though I will remain a director for the rest of the year.

My accountant is telling me that tax and NI on the £23,000 has to be calculated using a monthly earnings period, meaning total tax bill will be about £13000. I, using a yearly earnings period, had calculated it should be about £7300.

The accountant has said that since they specified a monthly "payroll frequency" at the beginning of the year, it is a HMRC requirement (and not a limitation in their procedures or software) that they continue to use a monthly period, they cannot change this.

I'm still not convinced that the law requires me to deduct £13,000. Any accountants care to comment?

I have never heard of payroll software that gives you this option!

I am unsure exactly what your deductions are but it sounds like a large chunk of the deduction is due to your NI being calculated using the directors NI method. This means you will pay 0% NI on your first £7,748, 12% on the next £33,696 and 12% thereafter regardless of the months your salary payments are made.

As you are firmly within the 12% bracket this will mean a large chunk of NI being paid this period. However, on the plus side, once you have exceeded £41,444 in earnings you will begin to pay 2% and will do so for the remainder of the year.

If it is tax you are concerned with, another reason more tax may have been deducted (other than the peculiar software option) is if you are on a W1/M1 tax code, although this would only result in roughly £1,700 additional tax.

Note that, unlike NI, any overpaid tax will be refunded on submission of your self-assessment tax return so you need not worry.

I hope this helps.

Martin

[Contreras]

Some googling I did a little earlier highlighted that for RTI, HMRC have put a temporary stop to people changing to annual salaries because they are overwhelmed by requests for this. This could be the issue, though it seems a bit odd that my tax can be doubled because HMRC are having trouble with their admin, rather than because of a change in the law governing taxation of directors.

That is true but it shouldn't affect the NI calculation. Prior to RTI most companies would not have been on annual schemes yet their directors would still have paid NI using the cumulative method.

Edited to add: I have no intention of paying £13000 tax, if I can't resolve this I will not pay the bonus this month and give up on reclaiming 2012 corporation tax.

With no concrete reasoning to support their calculation you might give up on the accountant as well!

[malvolio]

To answer a couple of questions, a "bonus" is just another name for salary that's over and above normal salary.

The "bonus" is to offset all my IR35 liability accumulated so far this year, so is covered by work I've already done. (Although June's work will only be invoiced/paid in July.) I do treat myself as IR35-caught.

To clarify further, I want to pay the salary before the end of this month because it's the end of my company tax year, and creating a loss will allow me to claim back last years corporation tax. I am likely to wind up the company next year, and have calculated that by doing this I can wipe out all profits for 2012, 2013 and 2014 tax years. (I am only paying as much salary as IR35 requires, or in the case of apr 2014 onwards, as much as I can without incurring any PAYE. So I'm not paying unnecessary tax on salary in order to try and save corporation tax.)

To those who've mentioned cumulative method etc, that is exactly how I think it should be done, I've sent accountant a link to HMRC document saying it should be done like that, and when they said that their payroll software would not do it like that, I told them to just use Excel, or even just use the figures I'd calculated in Excel. It was at that point that they claimed it was HMRC who forbade them from changing from using a "monthly payroll" to an annual one.

I put the term "monthly payroll" in quotes, because I would have expected them to have used the term "monthly earnings period", so I don't know if we are still talking at cross-purposes.

Some googling I did a little earlier highlighted that for RTI, HMRC have put a temporary stop to people changing to annual salaries because they are overwhelmed by requests for this. This could be the issue, though it seems a bit odd that my tax can be doubled because HMRC are having trouble with their admin, rather than because of a change in the law governing taxation of directors.

Edited to add: I have no intention of paying £13000 tax, if I can't resolve this I will not pay the bonus this month and give up on reclaiming 2012 corporation tax.

Fascinating. That makes no sense at all on first reading...If you're IR35 caught, you have no flexibility on what you pay yourself, it's 95% of gross income less some allowable expenses as salary. There will never be enough profit to make CT, dividends or cash retention a consideration.

So clearly I missed something and will have another read...

[IR35 Avoider]

To answer a couple of questions, a "bonus" is just another name for salary that's over and above normal salary.

The "bonus" is to offset all my IR35 liability accumulated so far this year, so is covered by work I've already done. (Although June's work will only be invoiced/paid in July.) I do treat myself as IR35-caught.

To clarify further, I want to pay the salary before the end of this month because it's the end of my company tax year, and creating a loss will allow me to claim back last years corporation tax. I am likely to wind up the company next year, and have calculated that by doing this I can wipe out all profits for 2012, 2013 and 2014 tax years. (I am only paying as much salary as IR35 requires, or in the case of apr 2014 onwards, as much as I can without incurring any PAYE. So I'm not paying unnecessary tax on salary in order to try and save corporation tax.)

To those who've mentioned cumulative method etc, that is exactly how I think it should be done, I've sent accountant a link to HMRC document saying it should be done like that, and when they said that their payroll software would not do it like that, I told them to just use Excel, or even just use the figures I'd calculated in Excel. It was at that point that they claimed it was HMRC who forbade them from changing from using a "monthly payroll" to an annual one.

I put the term "monthly payroll" in quotes, because I would have expected them to have used the term "monthly earnings period", so I don't know if we are still talking at cross-purposes.

Some googling I did a little earlier highlighted that for RTI, HMRC have put a temporary stop to people changing to annual salaries because they are overwhelmed by requests for this. This could be the issue, though it seems a bit odd that my tax can be doubled because HMRC are having trouble with their admin, rather than because of a change in the law governing taxation of directors.

Edited to add: I have no intention of paying £13000 tax, if I can't resolve this I will not pay the bonus this month and give up on reclaiming 2012 corporation tax.

[Wanderer]

I paid £641.33 salary in April and May. I want to pay aprox. £23,000 in June. This will (probably) be my last salary payment for my 2013/2014 year, though I will remain a director for the rest of the year.

Why are you taking a bonus not a dividend?
Can you take it as a director's loan instead?