Noob here, tying self up in knots of NI calculations! please help!

[Glencky]

Hi folks, my first post on the forum here so understand will be moderated. Must try not to swear!

I've done a load of research myself on this subject in the last 24 hours, and I've searched and read various articles and threads on here, but can't find the answer to my specific question, so any help gratefully received.

I set up my limited company in January, a few days before starting my first contract. Because of inevitable delays in payment of invoices, I'm only now in a position to pay myself my first salary. Background is that I have not worked or earned any income whatsoever so far in the 2013-14 tax year. I was made redundant at the end of 2012 and decided to take the opportunity to have a whole year off (I know, lucky me) and that's what I did. So as it's turned out, the salary I'm about to pay myself (before April 5th) will be my only salary in this year.

I need to consider IR35 carefully for various reasons and determine, on an ongoing basis, what my regular salary and dividends will be. However in the short term, I just need to pay myself some money in a way that's as tax and NI efficient as realistic. At this point I'd prefer to do it 'simply' (ha!) by 'just' paying salary rather than dividends. And of course I have my full annual allowance for income tax of £9,440 (or whatever it is) available as I haven't worked so far.

The amount I actually have available to pay myself is about the same as the tax threshold as it happens (having deducted the relatively small business expenses I've had to date - company setup, professional indemnity, accountancy fees). So all I'm trying to work out is how much Employers' NICs and Employees' NICs I'm going to have to pay, in order to work it back to what salary I pay myself.

I mentioned accountancy fees so you now know I've got an accountant and would think this was a conversation I could have with them. So did I! However so far they've given me two different spreadsheets with 2 different calculations and having gone into it a bit myself I'm certain the first is wrong and I think the second is wrong also!! Clearly there are wider issues here I need to pick up (I don't think this is the most complicated calculation if you know what you're doing so it bothers me they can't do it...) but for now I just need to understand things better myself so that on Monday I can have a sensible conversation about it.

So first of all, I understand the tax thing completely. I have a personal allowance, if I pay myself less than that there will be no tax implications. Easy.

On the NICs, what I don't understand is whether a) employees' or b) employers' work the same as tax or not. What I mean is, I know the NIC thresholds are divided into weekly/ monthly/ annual limits. I THINK however that since I only started the company - and hence my employment with it - in January, it's not as simple as me being able to count the whole annual threshold amount before paying NI. I think it's pro-rata so essentially about 3 months' worth of NIC thresholds between January and April. So unlike tax where I can apply the whole personal allowance for this salary, with NICs it's pro-rata. Is that right?

Except that I read something somewhere that suggested employees' NICs might work differently - as an employee I might be able to use that whole annual figure. But as an employer it's just the pro rata amount between January and April.

I've tried to be as clear as possible but am tying myself in knots on this having found various 'layers' of information in the last 24 hours. I do know, for example, that there's an extra director's calculation to be done at the end of the tax year (which for me at this point is at the same time, I guess).

If anyone can explain things a little more clearly and in simple terms that look at the principles, I'd be eternally grateful! From years of employment I already understood NICs to a level, and I used to think I was fairly intelligent. But between the partial/ rubbish info given to me by my accountant and my research on the internet, and my inability to come to a conclusion from the two, I'm starting to think I should revise my own opinion of myself..!!

All help gratefully received.

[northernladuk]

Don't want to be rude but you pay an accountant for a professional service. If they are not giving you one then push them hard to find out why not. If they are still not meeting your needs move. You really need one you can trust implicitly but may need to ask a few questions here to check, not come to a load of strangers with a complicated situation expecting an answer when the people you pay are not stepping up.

You will see that NW, InTouch and a few others regularly post answers on here for free. If you are in the pickle you are in I would suggest ringing them and getting yourself on their books and get a quality service you can trust.

First call is sort your accountant out.

Sorry.

[Platypus]

It's my understanding that NIC is not cumulative like a taxable allowance. I've written speadsheets with calculate NI and while they are not bang on, they're pretty close. Here's my understanding.

In any pay period (use the weekly values if you are paid weekly or the monthly values if you are paid monthly) NI (ees and ers) is due on the gross amount of money paid to the employee if it is above the lower limit and below to UEL. If one week/month you earn nothing, then nothing is due. If the next week/month you earn £1000 then NI is due on the £1000. Simples.

Now, back in the "old days" some clever tax avoider realised that if he took his whole year's salary in just one single month of the year, then NI would only be due on the qualifying amount below the UEL. e.g. earn £12k pa then you pay NI on £1000 each month. But if you get just one £12 pay packet a year, then NI was due not on the whole £12k but only on the monthly UEL (say £2k) so you save/avoid a load of NI. So, director's NI was brought in to ensure that over the year you have paid the "correct" amount of NI balanced over the year, so people could no longer use that trick.

Summary: if you are a director of your Ltd then director's NI applies so you will pay NI on what you have earnt in the whole tax year. Seems that you've earned very little, so my guess it that not much NI is due. Shame your accountant can't work this out for you.

Hope this helps (a bit)

EDIT: try this http://www.hmrc.gov.uk/calcs/nice.htm

EDIT2: p.s. agree with NLUK, your accountant sounds useless. I use a local accountant and I'd expect him to sit down with me and explain all this face to face. If your guy can only send you spreadsheets with conflicting numbers, go figure.

[ASB]

To add to what platypus said as a director it depends on when the directorship occured. I.e. half they year is half the allowances.

there are a number of ways in which directors ni can be calculated. They dont affect how much, just when. If they still send out the tables they should have worked examples. If not it will be pretty easy to find on hmc website.

[Glencky]

Hi folks, sorry for seemingly ignoring your replies. Since my post was going to be moderated I assumed wrongly I would get a notification when it was posted - my bad. So I didn't realise it was posted and hadn't seen the replies until now. Thanks very much for taking the time.

First, yes I know my accountant is useless, that had already been demonstrated for me before today with something else but I'd given them the benefit of the doubt! it's a really bad time to change now but I will be as soon as I can (and before that, feeding back as to exactly why). I will also be pushing them hard - tomorrow, when they're back in the office - to resolve this current situation to my satisfaction. However I was trying to get my own knowledge up because frankly I don't have a lot of confidence in their ability to come up with the right answer 3rd time so the more I know the better I'm likely to know what questions to ask and how much to trust what they're now saying. Ridiculous, I know, but necessary in my current situation (and my reasoning is it's never going to be bad to understand more about this stuff now that I've got my own company).

Platypus thanks very much for that very helpful commentary which was just what I was looking for.

To ask a very specific question: I can see how employers' NICs can only be calculated over a time period covering the employment i.e. in this case January to April. So I should be able to benefit from the lower free-of-NICs threshold for that time period but not the whole year (and this is where the director's NICs calculation comes in). As an employee however, only thinking about things as a point of principle and bearing no relation to what is actually the case! I'd have thought it a little unfair not to benefit from the entire annual limit. So the question is, could I? Let's say if I was doing this through an umbrella company and hence not a director, I can see how the employer's NICs are calculated (thresholds for Jan to April, apply 13.8% and then 2% if applicable above that) but would the employees' NICs be the same or as an employee, having not worked earlier in the tax year, could I benefit from the entire annual value of the NIC-free threshold?

Thanks again for your help.

[ASB]

Hi folks, sorry for seemingly ignoring your replies. Since my post was going to be moderated I assumed wrongly I would get a notification when it was posted - my bad. So I didn't realise it was posted and hadn't seen the replies until now. Thanks very much for taking the time.

First, yes I know my accountant is useless, that had already been demonstrated for me before today with something else but I'd given them the benefit of the doubt! it's a really bad time to change now but I will be as soon as I can (and before that, feeding back as to exactly why). I will also be pushing them hard - tomorrow, when they're back in the office - to resolve this current situation to my satisfaction. However I was trying to get my own knowledge up because frankly I don't have a lot of confidence in their ability to come up with the right answer 3rd time so the more I know the better I'm likely to know what questions to ask and how much to trust what they're now saying. Ridiculous, I know, but necessary in my current situation (and my reasoning is it's never going to be bad to understand more about this stuff now that I've got my own company).

Platypus thanks very much for that very helpful commentary which was just what I was looking for.

To ask a very specific question: I can see how employers' NICs can only be calculated over a time period covering the employment i.e. in this case January to April. So I should be able to benefit from the lower free-of-NICs threshold for that time period but not the whole year (and this is where the director's NICs calculation comes in). As an employee however, only thinking about things as a point of principle and bearing no relation to what is actually the case! I'd have thought it a little unfair not to benefit from the entire annual limit. So the question is, could I? Let's say if I was doing this through an umbrella company and hence not a director, I can see how the employer's NICs are calculated (thresholds for Jan to April, apply 13.8% and then 2% if applicable above that) but would the employees' NICs be the same or as an employee, having not worked earlier in the tax year, could I benefit from the entire annual value of the NIC-free threshold?

Thanks again for your help.

No. Nics are based on pay in a pay period. As said it is annual or pro rata for directors. Generally weekly or monthly otherwise. It is not cumulative. Thats the way it is.

[Glencky]

No. Nics are based on pay in a pay period. As said it is annual or pro rata for directors. Generally weekly or monthly otherwise. It is not cumulative. Thats the way it is.

Thanks for this. I'm nearly there now! sorry, bit painful I know.

A final question: how does it work if your pay period covers a time period other than a nice clean 'one week' or 'one month' - do the thresholds get further pro-rated (e.g. daily?)

Explanation for why I'm asking: I now have all I need to make calculations and it's obviously pretty simple now that I understand the principles. Given that until now I have been unable to pay myself, I think I can now choose to pay myself for January (a month in which I was only employed/ a director for part of it), February (full month), March (full month) and April (part month, to 5 April). Feb and Mar - easy calculations. January - not a whole number of weeks in my employment period - pro rated daily or only works in whole weeks so if you were a bit less than 2 weeks you only get the threshold for one week say?

April a whole different kettle of fish as I will be employed/ a director for the rest of April too, but that in a different tax year with slightly different thresholds - whole other kettle of fish. Does the whole of April just switch to being a monthly pay period with monthly thresholds on 2014-15 rates? or are days 1-5 pro-rated on 2013-14 rates, remainder of month pro-rated on 2014-15 rates (so I could separate out the two?)

I'm mostly just asking this because I want to understand how it works, might be easier just to pay myself for Jan, Feb and Mar but I'm interested now!

[SueEllen]

If your accountant is useless even if you have to spend some money to get away from him/her it's money well spent.

There are some accountants who deliberately do company accounts just before your yearly accounting deadline to make it harder for you to change accountants. It's worth changing just because they do.

[Glencky]

SueEllen, yes I agree with you completely. It's not money stopping me changing, it's timing. It would be too much disruption for me to do this now, particularly because I'm leaving the country in a week for 4 weeks. But rest assured, this is not a situation that is going to continue. It's been so bad I'm considering making an attempt to get back the money I've already paid them - but I'll see. It may not be worth the time and effort. Depends how it goes from here on in! but yes, I will not be staying with them. I'm not even in the territory where they'd be able to make up lost ground with me any more, too many things that I consider should be well within their capabilities have been done poorly.

[ASB]

Thanks for this. I'm nearly there now! sorry, bit painful I know.

A final question: how does it work if your pay period covers a time period other than a nice clean 'one week' or 'one month' - do the thresholds get further pro-rated (e.g. daily?)

Explanation for why I'm asking: I now have all I need to make calculations and it's obviously pretty simple now that I understand the principles. Given that until now I have been unable to pay myself, I think I can now choose to pay myself for January (a month in which I was only employed/ a director for part of it), February (full month), March (full month) and April (part month, to 5 April). Feb and Mar - easy calculations. January - not a whole number of weeks in my employment period - pro rated daily or only works in whole weeks so if you were a bit less than 2 weeks you only get the threshold for one week say?

April a whole different kettle of fish as I will be employed/ a director for the rest of April too, but that in a different tax year with slightly different thresholds - whole other kettle of fish. Does the whole of April just switch to being a monthly pay period with monthly thresholds on 2014-15 rates? or are days 1-5 pro-rated on 2013-14 rates, remainder of month pro-rated on 2014-15 rates (so I could separate out the two?)

I'm mostly just asking this because I want to understand how it works, might be easier just to pay myself for Jan, Feb and Mar but I'm interested now!

As I said it is really easy to find on hmrc website. There is a booklet on it. Ca44 I think. It covers all aspects. However, ultimately ni is due on:

No of days as a director/365 x annual lel.

now, as I mentioned it can actually be calculated I a number of ways all detailed in the booklet. If the total paid is different then a balancing payment is due.

in effect as a director it does become a cumulative calculation within the earnings period. Even though ni is not cumulated.

there are also issues if you have more than one employment.

But go through that booklet applying it to your position and it really does become fairly trivial. If after reading it you have specific difficulties then raise them.

if you get desperate give dates and amounts.