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Monthly payroll scheme for Company Directors 

Save corporation tax of £1,640 per year

Get National Insurance credit each year towards your state pension

Take a tax efficient salary from your company, get a payslip each month and a P60 at the end of the tax year.

Any questions? Have a look through the FAQ, or get in touch.

FAQ

Why run a payroll scheme

If you’re running a one-man (or woman) company, why should you run a payroll scheme at all?

There are two main reasons:

  • Firstly, it’s tax-efficient. Salary is tax deductible for your company, whereas dividends are not. Provided you pay a salary below the level at which National Insurance becomes due, there will be a tax saving. The director’s salary is tax deductible for the company, saving corporation tax  of £1,640 on an annual salary of £8,632, and is usually  not taxable in the hands of the director, as it will fall within his or her personal allowance.
  • Secondly, it’s important that the director is paid over the Lower Earnings Limit (LEL)for National Insurance in order to receive a pension credit for the year and qualify for certain state benefits. The LEL in 2019/20 is £6,136 per year.

If a salary over the LEL is paid, it’s compulsory to register a payroll scheme and submit returns to HMRC. We take care of the payroll scheme, submitting a monthly return to HMRC and providing you with a monthly payslip.

Paying a tax-efficient salary
  • It is important that the director is paid a salary over the Lower Earnings Limit (LEL) for National Insurance in order to qualify for certain state benefits, including a state pension credit. The LEL is £512 per month.
  • Employee’s primary class 1 contributions (at 12%) and Employer’s secondary class 1 National Insurance contributions (at 13.8%) are due when pay exceeds £719 per month.
  • So the optimum amount that an employee or director needs to earn is between £512 and £719 per month, or between £6,136 and £8,632 per year.
  • The salary is tax deductible for the company, saving corporation tax  of £1,640 on an annual salary of £8,632, and is usually  not taxable in the hands of the director, as it will fall within his or her personal allowance.
  • Company profits which aren’t paid as salary can be paid to shareholders as dividends. The company pays corporation tax on funds which are paid out as dividends, which is why it’s more tax efficient to pay a salary up to the point where National Insurance beomes due on the salary.
State pension

To get the full basic state pension you need a total of 30 qualifying years of National Insurance contributions or credits.

If you run your own company, in order to receive a pension credit for the year, it is important that you are paid over the Lower Earnings Limit (LEL) for National Insurance. The LEL in 2019/20 is £6,136 per year.

Payroll returns are compulsory if any director or employee receives over £6,136 per year. Without payroll returns HMRC don’t know about your salary, and don’t credit your National Insurance record. Dividends, and any other investment income, do not attract National Insurance so do not generate pension credits.

Minimum Wage

The minimum wage does not apply to company directors unless they also have contracts that make them workers.

Usually payments to directors do not arise from an employment contract but as remuneration for holding the office of director.

A director can be both an employee and an office holder in the same company. If this is the case the minimum wage applies only to work carried out under the contract.

Pension auto-enrolment

Employers are legally required to automatically enrol employees into a pension scheme. However, a company with just one director and no other employees is exempt from auto enrolment.

Where there is more than one director of a company, or the company employs other people, auto enrolment duties apply to directors if the director is a ‘worker’. A directorship is an office, not necessarily an employment, and being a company director does not of itself make a person a worker or an employee of the company.

Directors are workers if they have a contract of employment, which doesn’t need to be in writing. If this is the case, relevant aspects of employment law, including pension auto-enrolment, apply.

Employment Allowance

The Employment Allowance is a reduction of up to £3,000 per year in Employer’s National Insurance.

Employer’s National Insurance only becomes due on salary over £719 per month. Companies where the director is the only employee paid over £719 per month do not qualify for the Employment Allowance.

Where a company does qualify for the Employment Allowance, it can be more tax efficient to pay a slightly higher director salary, up to the level of the personal allowance (£12,500 in 2019/20) until the point where the allowance has been fully utilised.

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Stillness Road Limited - Registered in England & Wales - Company no. 11006039  - VAT no. 280569284 - Registered Office 329 Hills Road Cambridge CB2 0QT