Payroll As A Company Director

Do you know the correct way to deal with Company Directors on the payroll, including NI, submissions, expenses, responsibilities and benefits payable.

Being the Director of a Limited Company may sound great but it has many responsibilites.

As a Director you are responsible for company law, taxes, document keeping and HMRC submissions to online services to mention just a few.  

Directors are NOT self-employed, they are an employee of the company.  The company is the employer. You will need to send a self-assessment return if you receive other taxable income outside of your company.  You can check to see if you need to send a tax return on the Gov.UK website.

LIMITED COMPANY SET UP

Always notify HMRC if you are changing your company from self-employment to a Limited Company.  You will need to draw up your final accounts as a self employed trader and submit these to HMRC for your self assessment and pay the final amounts on your class 2 and class 4 National Insurance.  You can always request the help of your accountant for this.  You will need to notify HMRC if you wish your accountant to act on your behalf, so speak to your accountant to help you with this too.

As we said above, Directors are treated as employees on the payroll.  This means their tax and NI is collected via the PAYE online employer service.  This is processed in  "real-time" via the PAYE Online Service.  All companies are employers, so you will need to register online the company as the employer with HMRC and then enroll for PAYE services.

TAX

You will need to pay income tax and NI on the following earnings:

Salary, overtime, fees, bonuses, and commissions.  You do NOT include dividends in the payroll. 

You can set up and run the payroll yourself using HMRC Basic PAYE tools for small businesses or use a commercial payroll software such as Xero.  Remember when registering yourself as an employee, your start date is the date you appointed yourself as Director, not when the company may have been set up and incorporated. 

NATIONAL INSURANCE

There are two ways to pay a Directors NI, Cumulative Method and Normal Employee Method.

Cumulative Method (Standard Annual Earnings) means calculating the NI each time for the Directors who are paid irregularly, this is calculated in the PAYE tools on a cumulative basis to the year so far, including bonuses. Then at the end of the year the amount is added up and any final payment due after the allowances on NI are calculated and paid.  The same method applies to the employers contribution also when using this method. 

Example, a payment of £2000 is made to a Director, but as it's below the annual threshold no NI is payable.  Each payment is then accumalated until the annual threshold is met and then NI is payable.

Primary Employee threshold is £9568

Secondary Employer threshold is £8840

The Director if paid this amount over the next 6 months will therefore not pay any NI until he has reached over the threshold in month 5.

Normal Employee Method (known as Alternative Method) is used for Directors who are paid regularly. The NI is calculated for that payment (week/month) and then at the end of the year, the total annual salary is then calculated and the NI payments already made are deducted and any difference payable

Thresholds are the same whichever method you use.  When you submit your Full Payment Submissions online you will use either AN for standard annual earnings (cumulative) or AL for Alternative method.

When you set up yourself or any employees on your PAYE online payroll service, you will need either the P45 or complete a new starter checklist online, for example if you do not have a P45 or were self employed beforehand.  This will then be submitted by the FPS (full payment submission).  Keep a copy of the starter check list in your records.

You will need to submit an EPS (employer payment submission) every month, even if you do not pay any payments.  You just add the period of no payments and submit.

If you decide to pay yourself or employees annually, you will need to register this with HMRC for the Annual Scheme and send an FPS at the point of the annual payment.  You do not need to send an EPS when registered for this.

NATIONAL MINIMUM  & LIVIING WAGES

Directors do not need to be paid, nor are they entitled to the national minimum wage.  

All other workers must be school leaving age to be entitled to the National Minimum wage and over 23 to be entitled to the National Living wage.

If the Director is the only paid employee of the company, they cannot claim for the employment allowance of £4000 that HMRC offer for companies to reduce their NI liability.  

EXPENSES & BENEFITS

Travel costs to get to a meeting, equipment to work from home for example, health insurance and lunch vouchers etc.  These all need to be kept in your records.

DIVIDENDS

Dividends are paid by the company to the shareholder out of the profits the company has made.  This is after debts and tax commitments have been paid.  Dividends are classed as income for tax purposes but NOT National Insurance purposes.  These will be included on your self assessment return.  You have an allowance of £2000 tax free on dividends before tax is payable.  Do NOT include dividend payments in your payroll. You can find out more about taking money out of a company here.

As a Company Director you are also responsible for the following for your employees:

Statutory sick payments SSP, maternity and paternity pay and holiday pay.

Off-payroll working rules for contractors etc.(IR35) is a complex system and you may want to get advice from your accountant on this.

RECORDS

You are required by law to keep a certain company records.  Such as any company spending as well as any split payments where you reimburse anyone for travel, equipment etc.  These can be kept electronically so always keep a back up.  All payroll records need to be kept for 3 years from the end of the accounting year.

Directors loan accounts are complex so always get advice on this, especially if you are claiming interest.

Keeping accurate records and always staying ahead will help you avoid any penalties.

MAKING TAX DIGITAL

If your company turns over more than £85k a year then you are required to be VAT registered and submit all VAT data digitally online.  From 1st April 2022 all businesses that are VAT registered will be required to submit all company data digitally as part of the governments plan of "Making Tax Digital".

You can register for Making Tax Digital and submit your data digitally even if you're not VAT registered or over the £85k threshold, learn more about it here.

If you need more help organising your company setup and accounts, including payroll and bookkeeping then get in touch today!

The BR Accounting & Business Team