Your spouse/civil partner may not have any income at all, and almost certainly your children don’t. This means their personal allowance is being wasted every year. Even children are entitled to a personal allowance.

If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as wage, they would pay no tax on it and your business profits could be reduced.

Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict their working hours further.

If you pay just 20% income tax and 8% Class 4 National Insurance this would save you £1600 every year on each salary. And how many children do you have?

STOP! It’s not quite that simple. To pay wages like this you need to follow the following rules:

• It must be for work actually done. Now it’s going to be tough to argue your 2-year-old son is working for you but many wives/husbands do work and mature children may also help out.

  May be they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn’t count, as valuable as it may be. Draw up a list of their responsibilities to help your case.

• At present they do it for free because it’s a family business but they should and can be paid for it. If you make your spouse a director, all the responsibilities of this imposed by Company Law must be worth something.

• You can also do this where you have property that you rent out and the spouse manages the properties.

• If this is the case, it’s reasonable to pay them a salary commensurate with what they actually do. How much would it cost to get someone in to do that job? The minimum wage level is at least a good place to start but more if you can justify it.

• The amount must actually be paid. It’s no good the accountant just putting it through the accounts at the end of the year.

  Pay it, ideally through the bank rather than cash so that it’s easy to prove it’s been paid and record it in your accounting records.

• Comply with any PAYE procedures such as getting a P46 signed, completing an end of year PAYE forms as you would do for normal staff. Remember, it may also help keep up their National Insurance contribution record even if they don’t pay any National Insurance on the salary.

Irrespective of the form of business in which you operate, if you are going to have employees, then you will have to contend with payroll taxes.  The brief summary that follows will give you some guidance in the rules and regulations of H M Revenue & Customs.

Helpful publications

H M Revenue & Customs publish various booklets relating to how PAYE is operated and the legislation that you have to comply with.  Not only do you collect and remit PAYE to the Collector of Taxes on behalf of H M Revenue & Customs, you also operate the sick pay scheme and maternity pay scheme.  You should run the PAYE scheme in accordance with the legislation and should you fail to comply then H M Revenue & Customs will look to you for the tax or NIC you failed to deduct.  This can be costly if you are unable to recover the tax and NIC from the employee.

Do you have employees?

Whether an individual is an employee or not in a particular situation is a question of fact depending on the terms on which he works.  The question of whether an individual is employed or self-employed is very important for the business “employing” him or her, as that business has to comply with the reporting requirements.

In certain areas H M Revenue & Customs has placed emphasis on reclassifying individuals claiming to be self employed and has issued leaflet IR56 entitled “Tax: employed or self employed”.  This booklet sets out the questions that should be answered to determine the problem.  If you have treated someone as self employed and subsequently after a routine visit from H M Revenue & Customs it is clear that they were employees, then the tax and NIC which should have been paid will be assessed on you.  Therefore it is important to ensure when using the services of self employed people, that they are in fact self-employed. If doubt exists as to the status of an individual, the situation can be clarified with H M Revenue & Customs.

The Operation of a PAYE Scheme

Upon registration H M Revenue & Customs will send to you guidelines on operating PAYE, National Insurance, Statutory Sick Pay and Statutory Maternity Pay (employer’s pack). Included will be a number of forms with which to operate the PAYE and NIC system.  You should familiarise yourself with and have supplies of these forms, which are as follows:-

In order to calculate the amount of tax and national insurance due by an employee, H M Revenue & Customs will supply you with sets of tables.  By reference to the “tax free” tables and an employee’s tax code you will be able to calculate the amount of salary that is not subject to tax.  The difference between this figure and the gross amount is the employee’s taxable pay.  This can then be calculated by reference to another set of tables.  The employer’s and employee’s national insurance is calculated by reference to the gross pay with a third set of tables.  Special rules exist for the calculation of national insurance for directors.

The tax and national insurance should be paid to H M Revenue & Customs by the 19th of the month following that in which the salaries were paid.

In most businesses, the directors, and often the employees, have benefits that are not immediately taxed through the PAYE system, the most usual being the provision of a car and possibly fuel.  Class 1A national insurance contributions are due on the taxable value of these benefits in kind and are due on the 19 July following the fiscal year in which the benefits are made available.  In addition, H M Revenue & Customs requires on an annual basis, a form P11D (Return of expenses payments and benefits) for all directors irrespective of income and all employees receiving remuneration including the benefit in excess of £8,500.  For those employees earning less than £8,500 but who receive expense payments and benefits, a form P9D is required.

A form P46(Car) needs to be completed quarterly on 5 July, 5 October, 5 January and 5 April if any employees have been provided with or have changed their company car.  Further details are given on the taxation of company cars in Inland Revenue leaflets IR132 and IR133.  H M Revenue & Customs will still require form P11D to be submitted annually in addition to the P46 (car) forms.

Please contact us for further help.

A significant task for the new business owner is ensuring that the business is properly complying with the extensive tax and information filing requirements imposed by the various authorities. Problems and penalties could arise if the new business is not registered with the appropriate tax authorities in a timely fashion. While this post is not intended to be an all-inclusive list of filing requirements, it summarises some of the more prominent requirements common to most businesses.

HM Revenue & Customs It is necessary to notify HM Revenue & Customs of your existence by completing forms CT41G (companies) or CWF1 (sole traders/ partnerships). The form notifies HM Revenue & Customs of your accounting date, your accountant, and also enables a PAYE (Pay As You Earn Scheme) to be set up, which is a requirement if you are to be an employer. If you fail to register within the first three full months of commencing business a penalty of £100 may be levied.

H M Revenue & Customs – NI Contributions Office

Depending on the level of profit, sole traders and partners have a liability to Class 2 NIC, and these are payable either quarterly or monthly by direct debit. Class 2 contributions are at a weekly level of £2.40 (where annual earnings are £5,075 or more for 2010/11) and the necessary form to collect Class 2 contributions should be completed at the same time as the form CWF1. Leaflet CA02 ‘National Insurance contributions for self-employed people with small earnings’ gives full details and an application form for exemption from liability.

H M Revenue & Customs – VAT

You need to consider if it is beneficial to be VAT registered from the outset. If you are registering for VAT, form VAT 1 needs completing, and if you are a partnership, form VAT 2 needs to be completed, in addition to the VAT 1, giving details of all the partners. Alternatively, an online registration process is available on HMRC’s website. If turnover exceeds the compulsory registration limit, £70,000 at 1 April 2010, in any period of 12 months or less Customs must be notified within 30 days of the end of the month in which the threshold was exceeded.