I have recently taken on a client who have not registered for PAYE/ NI. In addition they have not been given any advice on how they should pay themselves etc..
The company is run by 2 directors who pay themselves in the region of 1k per month.
My initial thought was to treat all the payments as dividends however this would result in them losing their tax free allowances.
At the end of the year can dividends up to the tax free allowance be treated as salary in the accounts? Or would HMRC object to this due to non-registration.
You can register a scheme, set the directors up on directors cumulative method, and pay them what they are owed for Apr14-Jul14 in a lump sum, without suffering and tax and NIC. You can only do this for this current PAYE year.
For previous years, you would have to deem their wages as being below the reporting threshold - about £455 a month. This assumes they have no other job.
I am not a payroll bod, but that's how I understand it. Hopefully someone will confirm/correct or add to that.
For 2014/15 you will first need to set up a paye scheme and declare a base salary just below the ni limit, in order to take maximum benefit of tax free allowances. As Michelle states you can pay them on that basis back to April 14 although you will be late filing for rti. No penalties are applicable at present for micro businesses so it won't be an issue. Simply do April payroll, submit then May Etc.
Unfortunately you won't be able to backdate it before April, as no paye scheme was in place, so anything prior to that will have to go down as dividends.
Can Christopher not set up a new scheme today and pay a first wage that would be a "bonus" to cover April 2014 to July 2014, using directors cumulative? That way he hasn't filed late, as its his first wage slip, albeit a higher figure. Under directors cumulative method, there will be no NIC or tax to pay, until such month that each director breaches the thresholds? If he pays the £3332 on 31.07.14 (or say £4165 on 31.08.14), he would have utilised the £833 per month so far, and can continue paying £833 per month up until the end of the year. He would post all wages as a credit to the directors account, to offset against what had already been drawn - the difference being dividend.
Of course, if either loan account went overdrawn by £10000 in any given month, benefit in kind/beneficial interest may have to be considered, but if the directors have only taken £1k per month so far, they should be below this limit. This assumes that for the 2013-14 year, they have drawn £1000 per month, £455 a month wage will clear some of this, and the rest will hopefully be swept up by dividend, meaning an opening balance would be in credit at the start of April, anyway. Highly depends on profits, in that case.
2013 - 2014
As I understand it, if the company was deemed to be paying £455 prior to April, there wouldn't have been a need for a PAYE scheme, if it was the directors only job since 06.04.13? Then, of the £1000 paid each month, £455 would be wage, and only £545 would be dividend? This again largely depends on what was happening with each director in that tax year.
Can Christopher not set up a new scheme today and pay a first wage that would be a "bonus" to cover April 2014 to July 2014, using directors cumulative? That way he hasn't filed late, as its his first wage slip, albeit a higher figure. Under directors cumulative method, there will be no NIC or tax to pay, until such month that each director breaches the thresholds? If he pays the £3332 on 31.07.14 (or say £4165 on 31.08.14), he would have utilised the £833 per month so far, and can continue paying £833 per month up until the end of the year. He would post all wages as a credit to the directors account, to offset against what had already been drawn - the difference being dividend.
Yes, and that's better than what I suggested. I've just tested it to make sure, and it works.
2013 - 2014
As I understand it, if the company was deemed to be paying £455 prior to April, there wouldn't have been a need for a PAYE scheme, if it was the directors only job since 06.04.13? Then, of the £1000 paid each month, £455 would be wage, and only £545 would be dividend? This again largely depends on what was happening with each director in that tax year.
My understanding was, that since April 2013, all earnings, no matter how small, have to reported through RTI. However in light of your comments, I have just double checked and this is correct only if a paye scheme is in place.
As there was no paye scheme in place, I'm fairly sure OP will be able to apply a salary just below the LEL, subject to your caveat. My apologies for the incorrect information.
Like you, I originally thought that if a wage was paid, no matter how small, a scheme was needed. It was the good people of BKN that helped me to understand the rules a bit better! At the time, I had a client who had done the same thing - no PAYE scheme - so he had to forgo some corporation tax saving and stick with a below LEL annual wage... but it gets some tax relief, so better than a kick in the teeth! :)
