Once you’ve started your own limited company and people are paying for your products or services, you may want to start taking a salary.
This is a good idea for several reasons:
- It’s the main way to legally move money from your business bank account to your personal bank account
- It ensures you continue to pay National Insurance contributions, (essential if you expect a government pension later in life)
- You pay tax to the government, thus preventing them from breaking down your door and demanding your money!
- It gives you some money to live off
This article is designed to take a lot of the jargon away from paying yourself. Paying salaries is sometimes called “running a payroll” but that’s a glorified way of describing the act of legally moving money from a business to individuals. This article was written for Directors of young limited companies who don’t want to shell out on expensive payroll services, but do want to ensure they stay legal without having to wade through the reams of documents on the HMRC website.
You don’t have to wait until someone has paid an invoice; as soon as you have a bit of spare time you can start on the path to a salary:
- Register with HMRC online “as an employer” (this notifies the government that you want to pay someone, even if it’s just yourself)
- When you receive your starter pack through the post, go online again and register for the “PAYE Online for Employers” service, (which allows you to fill in official forms online rather than writing them out and posting them)
- Pay yourself monthly, (send money from your company account to your personal account – see below)
- Pay tax and national insurance to HMRC monthly, (send money from your company account to HMRC’s account)
- At the end of the tax year (ie. every April) you will need to fill in a return, (this is less daunting than it sounds).
Once you have completed steps 1 and 2, which can involve a delay of 1-2 weeks while you wait for the paperwork to arrive, you will receive an Employer CD-ROM. Take the disc and stick it in your PC or Mac.
Forms, forms, forms
When you look through the HMRC website, it can feel like the whole world revolves around forms. If you decide to wade through all the documentation, eventually you’ll see a few patterns emerge:
- If you’ve got your P45 from your previous employer, it will make things a whole lot easier. (If you don’t have one, phone your ex-employer and ask where it has got to – they should have sent you one as a matter of course).
- You keep track of pay, tax and national insurance contributions (NIC), using a form called P11. This is made much easier using the interactive CD-ROM from HMRC, which has an electronic version of P11.
- At the end of the tax year you have to submit summaries to HRMC, (forms P14 and P35).
- The HMRC describe at least 3 ways of doing everything (CD-ROM, online, paper/post)
In the cases where HMRC explain multiple ways of doing things, I’m only going to discuss the quickest and most convenient method for a professional with their own computer, printer and internet connection. I’m going to also keep everything as free as possible – you can buy 3rd party software solutions to remove some of the grudge work from paying yourself, but such packages are usually designed for paying at least 10-50 people and cost around £100.
Use the CD-ROM; pay yourself; pay HMRC
First off, figure out how much your salary is going to be. It’s a good idea to have spoken to an accountant about the best strategy for paying yourself. If you are a Director you may be eligible to receive a share dividend at the end of the financial year which is subject to a lower tax rate than a high salary. Speak to your accountant about this.
For this example I’m going to use a small salary, £500/month pre-tax, to keep things simple.
Fire up the employer CD-ROM you received and click the ‘Calculators’ section. Then select the P11 calculator. You may have to enter a few details about your company, and about yourself from your P45. (Tip: even if you are a director, don’t select the “Directors’ cumulative NIC” as a policy for your NI contributions unless your accountant has advised you to).
You can then select your name and click ‘Enter Pay Details’. Enter your salary (£500 in our example)
The software will then calculate the tax and national insurance that will be due on your gross salary. This will include the tax that you pay as an individual, the national insurance that you pay as an individual, and the national insurance that you pay as a company, (ie. what your previous employer had to pay before you worked for yourself).
Once you have entered your salary into the CD-ROM, the View P11 Summary link will show you a big yellow form, (pictured left). This is the legally required record. At this point, it’s a good idea to print out both the tax and the NI form and keep them in your filing system. (The electronic copy you have is legally sufficient, but unless you make very vigorous backups, I’d take a hard copy to be safe).
Have a good look through the numbers in your P11 page and make sure they make a bit of sense – if you’re paying yourself a similar amount to a previous employment, it may help to compare some of the numbers with old payslips.
Make your own payslip
Before you go ahead and make the money transfers from your business account, it’s worth considering the subject of payslips for a few minutes. It is a legal requirement to produce a payslip for every employee (including yourself) that shows the breakdown of at least these items:
- Gross pay (ie. before any deductions)
- Income tax
- National insurance contributions (made by the employee, not the employer)
- Net pay (ie. take the gross pay, subtract income tax and then subtract employee NIC)
For your records and for professionalism, it’s a good idea to add a few additional details such as the pay day, the national insurance number, etc.
To avoid spending any money, I’ve prepared a simple spreadsheet that you can use to produce a legal payslip.
Download the basic payslip spreadsheet for free
Once you have the spreadsheet, fill in the relevant fields from your P11 print-out and print 2 copies; one for you as yourself and another for you as the employer. Ensure you keep them filed correctly, (ie. separately).
Show me the money
You can now go ahead and make these payments using your business internet banking:
- Pay the ‘net pay’ amount from your business account to your personal account.
- Pay the HMRC: add together column 1d from the National Insurance Contributions print-out you made, and column 7 from the PAYE Income Tax print-out you made.
For detailed instructions on how to transfer money to HMRC, read this page which describes several payment options. If for some reason you are due a tax refund, (as in the screenshot above), you must declare to HMRC that you will not be paying them for the given month.
End of the year
At the end of the tax year, (ie. 5th April), you must file a return that tells HMRC the breakdown of the income tax and NIC payments you made. The most efficient way to do this (and the gotchas) will appear later in Part 2 of this article.
Any other gotchas?
Did the steps above work for you? Have you already set up your own payroll and found some even better tips? Please share your experiences in the comments section, below.
I note you say
“(Tip: even if you are a director, don’t select the “Directors’ cumulative NIC” as a policy for your NI contributions unless your accountant has advised you to).”
Why is this – is it because you can extra interest by deferring NI payments till the end of the year?
Great article by the way – very helpful for us small companies!
Finally some straight forward advice!
HMRC are absolutely hopeless, they make it so ridiculously complicated for start-up businesses
HMRC makes things so difficult to understand. When its so easy and easy when simple information like that above. The people who dont understand tax make books so complicated so we werent able to learn tax more simply.