Above £102/week you have to operate a PAYE scheme.
Below £102/week the employee/director loses state pension rights.
Furthermore a PAYE scheme allows a director to extract £7200/year from the company entirely free of tax or NI or corporation tax.
So usually it is well worth running a PAYE scheme, and the trivial cost of the scheme is heavily outweighed by the tax advantages.
EDIT: And if there is justifiable work for a director's spouse who isn't employed elsewhere (eg doing the accounts, answering the phone, etc) you can extract an additional £7200/year in tax-free pay for the spouse as well. But they do have to be doing something that could justify that payment if an inspector were to query it.
-- Edited by Tom McClelland on Wednesday 25th of January 2012 06:11:08 PM
I've seen both the annual 260ths (based on a 5 day week) and the proportion of worked days in a month used.
Our software supports both methods (and some others, such as 365ths, including weekends) as it happens.
All methods can create bizarre anomalies. The problem with using the working days as a proportion of possible worked days in the month is that it means that the daily rate for days off varies according to the month of the year. Unscrupulous employees can take advantage of this by pulling sickies in months where it doesn't cost them so much to do so. The problem with using 260ths is that in a 31 day month someone who starts a job on Tuesday 2nd of a 31 day month can actually get paid more than someone who worked the entire month!
So no method is perfect. Just pick one and stick to it. (Or better yet get payroll software that supports a method and use that )
-- Edited by Tom McClelland on Wednesday 25th of January 2012 10:40:39 PM
I have a new client [Friend really], [ Limited co, with only a director as the sole employee] the clients Accountant last year set up the client with a PAYE scheme, the accountant then raises monthly payslips for £589, I assume this is to keep the director below the £7072 threshold and thus avoid paying any tax or Ni & avoid company paying any employers contributions, I guess the figure of £589.00 may change in April, with the new thresholds.
Anyway, this started me thinking, in this case is it a requirement that a PAYE scheme has to be set-up, for the foreseeable its only ever going to be this one director on the payroll, if his not incurring any tax or NI & no NI for company, is a PAYE scheme really necessary.
The Accountant charged £75.00 to set the scheme up and then charges an extra fee each month for processing the payroll.
Is it common practice to set-up a PAYE scheme for every limited company, regardless if the director wont be paying any TAX or NI?
not every LTD company needs to be registered for PAYE. There are different scenarios. You can find guidelines here: http://www.hmrc.gov.uk/paye/intro/register.htm
Hope this helps.
Fabs
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Thanks ever so much for the responses, Tom that explanation was just what I was after.
Going slightly off topic from my original question but still along similar lines, well Payroll at least.........
I've just had a client call me asking if there was a standard procedure when processing payroll in how to work out pro rata pay for a mid month employee joining her company?
She has obviously done some delving on the net, and was asking me should it be based on purely the number of days worked that first month or based on number of days in that month, She had me spinning
Employee joined on the 11th Jan, and pay is calculated to the end of Jan [31st], the employees salary is £20k per year and after this first month, her salary will be £1,666.67 p/m ongoing [20,000 /12]
How would others go about calculating the pay for Jan, I keep working it different ways and coming up with different amounts..
She then started asking about calculating holiday pay but think Ill save that scenario for another day, head hurts as it is !!!
I personally would pay 1/260 of the annual salary for every day worked in January, so for an employee starting on 11th it would be £20,000 divided by 260 (52 weeks at 5 days a week), multiplied by 15 (there being 15 working days between 11th January and 31st January. I'm sure other people will calculate it in different ways, you just need to make a decision and stick to it!
I would work it out based on working days in the month.
Assuming the employee works Monday to Friday, 11th to 31st is 15 working days out of a possible 20 so the gross pay will be £1,666.67 x 15/20 = £1,250.00.
This might be calculated differently depending on the terms of the employment contract but this is how I would work it.
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