New small business

by **missile** on Thu Jan 05, 2012 9:17 am

Hi,

I started a new small business in Nov 2010 to carry out engineering consultancy part time for a project. I believed that this would be maybe two days per week for circa six months, but this has turned into more days and longer duration. It was my intention to pay myself a nominal salary below LEL £583 per month thus avoiding NHI and tax. I do have other income from pension and savings.

I have completed my year end account and submitted same to my accountant. He tells me I should have registered for PAYE and if I make a late declaration I will incur fines and penalties. Is he correct? My understanding was if all employees are paid under the LEL then there is no requirement to register for PAYE. I would appreciate any advice you may have?

http://www.hmrc.gov.uk/paye/payroll/year-end/annual-return.htm#2

Many Thanks for reading my post.

by **pjclar02** on Thu Jan 05, 2012 10:16 am

Hello there

You are correct - if all employees are paid beneath the lower earnings limit, then a PAYE scheme may not be necessary. However, £583 is above the lower earnings limit for 2010/11. Is there any scope to vote an additional dividend for the amount over and above the LEL, and thus avoid the P35 filing penalty?

by **missile** on Thu Jan 05, 2012 12:21 pm

Hi,

Many thanks for your prompt reply. Can you please confirm LEL for 2010/11 and 2011/12 are £420 and £442 respectively.

Thanks for the heads up on dividend, It is out intention to vote additional dividend for me and my wife. There is scope for us to remain under the 40% tax threshold.

We are looking for ways to reduce our corporation tax liability on £40,000+ profit.

by **pjclar02** on Thu Jan 05, 2012 12:50 pm

Hello there

Yes - LELs are as you state.

Good luck with reducing your tax liability. For future years, the best time to think about tax planning is before the end of the financial year, as you become fairly restricted when trying to implement tax planning post-year end. Best to try and book an appointment with your accountant three months before the year end to look at projected profits for the year - this then gives you three months to implement any planning strategies.

Best wishes

by **missile** on Thu Jan 05, 2012 1:11 pm

Hi,

I have completed my accounts, but as this is my first year of trading I have some time to amend the figures before I am required to submit them.

My wife will earn £4,000 pa from a part time job with NHS. Does the LEL limit apply to her total earnings, i.e. the most I could pay her would be £1304?

:idea:

Going forward, in the future it may be more tax efficient to register for PAYE and pay more than LEL?

by **pjclar02** on Thu Jan 05, 2012 1:28 pm

I'll answer the easier bit first - yes it will be better to register a PAYE scheme and you can then pay as much as you like through payroll. Currently up to £7,072 free of tax and National Insurance.

Your wife's earnings through the NHS will not impact on the LEL for NIC purposes in relation to payments from your company. However, the existence of a second employment will impact on the PAYE code that she would be issued by HMRC for employment with you. This could therefore mean that you could not pay her up to the LEL as in all likelihood this would give rise to a PAYE liability!! Strictly speaking you should have a PAYE code from HMRC to apply against her income from your company - this could conceivably have been a BR code which would mean that you have to withhold tax on all of her salary - which therefore means you would need a PAYE scheme!!

Realistically, if she earns £4,000 from NHS, then she has £2,475 of her personal allowance remaining, so this would be the maximum that you could pay her over the course of a year without deducting PAYE (you would have to work out the monthly equivalents etc).

Definitely I would set up a PAYE scheme for 2011/12 - it will make your life much easier with minimal admin.

by **missile** on Thu Jan 05, 2012 2:44 pm

Many thanks. May I ask you to confirm that I have correctly understood your comments?

We can pay £420 per month up to April 5th 2011 and £442 thereafter to me. If I register for PAYE today, I would be able to increase salary to fully utilise my tax free allowance. Up to £7072 total taxable income without incurring NHI or TAX (i).

(i) Please be advised: I receive £3,515 in pension, thus there is no scope to do this.

I shall work out the figures for my wife. I shall have to be careful as she is registered to receive bank interest gross. I calculate she will receive circa £3,000.

by **pjclar02** on Thu Jan 05, 2012 5:02 pm

If you are already in receipt of a pension then this will also impact on the tax code that would be applied to your 2011 salary drawn from your company, which in turn would impact upon the amounts that you could pay yourself in 2011 before you have to pay tax. Effectively you are having to guess the tax codes that would have been issued by HMRC had you been registered employees of the company in 2011. This is something that you cannot really do.

I would have the discussion with your accountant about how best to proceed, but it may be worth abandoning the inclusion of a salary from November 2010-March 2011, registering a PAYE scheme for 2011/12, accruing a bonus in the year end accounts and paying this in January 2012.

by **mullet** on Thu Jan 05, 2012 7:57 pm

Firstly, can you confirm that you are operating via a limited company, as you do not explicitly say so in your original post.

My understanding was if all employees are paid under the LEL then there is no requirement to register for PAYE.

The strict position is that in the absence of a P45 issued by a previous employer the employer offers the employee a P46. You would have ticked it to say that you were in receipt of a pension, which would have triggered the use of tax code BR - basic rate 20%. So there was a PAYE failure in terms of a loss of tax at the time that the first salary payment was made. It doesn't matter whether it would have all been sorted out at the year end (i.e. that your personal allowance would have covered the salary). The PAYE regulations / employer guidelines are clear.

The 2010-11 employer returns (P14, P35 etc) should have been submitted by 19 May 2011.

by **missile** on Thu Jan 05, 2012 9:50 pm

Hi pjclar02,
I have tax codes as issued to previous employer and pension providers for 2010/11. I have P45 and P60s and thus I can accurately calculate my income to ensure I do not exceed LEL.

Hi Mullet,
I would confirm I am operating via a limited company. I do have P45 from previous employer. Are you telling me that I should have registered for PAYE and submitted a P14 / P35 by 19 May even if I did not exceed LEL for 2010/11?

Thankyou both for your help