Directors and annual payrolls – the first impacts of making tax digital

Over the last couple of months the legal sector team at Armstrong Watson has received a number of queries from Directors with regard to their eligibility for statutory entitlements such as free child care and statutory maternity pay. 

In a limited company structure, Directors will often decide to pay themselves their salary once a year through their annual payroll. This is particularly true in small companies without other non-director employees.

Annual payrolls for directors are a well established practice for all limited companies, not just those in the legal sector.  They allow increased flexibility for remuneration planning in owner managed companies, as well as being beneficial in terms of generating cost and administration savings as the whole payroll process is only performed once a year.

However, the recent move to digital tax accounts for all individuals is presenting some disadvantages to that annual method.

In order to qualify for certain statutory entitlements, such as SMP (paid via the employer), or Maternity Allowance (paid directly by the government), HMRC will need to know that the required level of earnings has been met by the individual. In addition, the nature of the calculations mean that regular earnings will often be required.  Similar rules apply for adoption and paternity/shared parental pay and leave arrangements, as well as the thirty hours of free childcare.

If an annual payroll is being used for a director, HMRC will either not see any earnings for the year until after the payroll has been processed, or if an annual payroll is processed at the start of a tax year, depending on the timing of the claim, it will not see regular earnings throughout the year.

Annual payrolls there fore now cause a potential issue for a number of Directors, in that they do not qualify for the entitlements despite both being employed and having sufficient earnings - albeit on an annual basis.

As annual payrolls for directors are a well established practice of which HMRC are aware, our Director of Payroll Services, Karen Thomson has spoken with HMRC for their thoughts.  From those discussions with HMRC, there doesn’t appear to be a suitable way of advising HMRC of any potential earnings during the year if an annual payroll is adopted.  An estimate of earnings can be made through your personal digital tax account, but it isn’t clear whether this method will, or can, link through to the entitlements information. 

Based on the above, Directors now essentially have two choices: keep paying themselves annually but accept they may not qualify for benefits or entitlements should the need arise; or pay themselves on a more regular basis. The actual annual earnings will be the same on both bases.

We would advise that if your company already processes a regular payroll as you have additional non-director employees, you should add yourself to the regular payroll (monthly/weekly etc.). Providing that regular payroll marks you as a Director, the normal annual National Insurance reconciliation will still take place. 

If your limited company does not currently process a regular payroll, then you should consider the need to set one up, and to begin to process the salary on a more regular monthly basis. This may result in both additional time and monetary costs to the company, although the issue with statutory entitlements would be eased.

Being included on the regular payroll for the company does remove some of the flexibility regarding remuneration planning, in that a salary level is being determined early in the year, before any results of the company can be considered.

We will continue to look into the different options and advise accordingly in future, as the digital world continues to move at a very fast pace.

 

 

Rosy Rourke                                                                         Karen Thomson

Legal Sector Director                                                         Director of Payroll Services

Armstrong Watson LLP                                                      Armstrong Watson LLP

 

Rosy Rourke is a Legal Sector Director at Armstrong Watson LLP, specialising exclusively in advising law firms.  The legal sector team advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services.  Further information can be found at:  www.armstrongwatson.co.uk/legalsector

Karen Thomson is Director of Payroll Services at Armstrong Watson LLP, providing payroll services to more than 1,500 employers.  Karen sits on a number of government working groups, ensuring that our clients are kept fully up to date on current and future developments.  Further information can be found at: http://www.armstrongwatson.co.uk/payroll-and-employee-services

This article is a general guide to the issues that we see in practice.  It is not a substitute for professional advice which takes account of your personal circumstances.  No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.

The Law Society has exclusively endorsed Armstrong Watson for the provision of accountancy services to law firms throughout the whole of the North of England.

 

 

Are you operating under the most appropriate trading structure for your personal circumstances? For further information on your structure options please contact Rosy at rosy.rourke@armstrongwatson.co.uk

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