Many owner-managed companies pay a director a single salary once a year, often at the year end, with dividends making up the rest. Running a monthly payroll with eleven months of nothing is pointless administration. HMRC’s annual scheme lets the company report and pay PAYE once a year instead.
When the annual scheme fits
The company must pay all the employees on the scheme once a year, in the same tax month. In practice it suits:
- one-director companies where the director takes an annual salary;
- companies where every person on the payroll is a director paid annually.
It does not fit if anyone is paid monthly or weekly, if pay dates vary, or if benefits in kind are payrolled.
Registering
Tell HMRC that the PAYE scheme should be treated as an annual scheme and in which tax month payments will be made; HMRC’s guidance on running payroll explains the current way to do this. Once HMRC has the scheme set as annual, it does not expect submissions or payments for the other months.
Running the annual pay run
- Calculate pay in the chosen month using the director’s tax code. Because it is a single annual payment, the full year’s personal allowance is available cumulatively.
- Submit one FPS on or before the payment date.
- Pay HMRC the PAYE and NIC by the 22nd of the following month (19th by cheque).
- Issue the P60 after the tax year ends, by 31 May.
If a payment has to be made in a different month, tell HMRC first; otherwise its records will not match the submissions and estimated charges can follow.
Director’s National Insurance
Directors use an annual earnings period for NIC, whatever the pay pattern. With a single annual payment, NIC is calculated on the whole amount against the annual thresholds, so the result is the same as for a monthly director paid evenly, but the calculation must be set to the director’s method in the payroll software. Many directors choose a salary around the lower thresholds so that a qualifying year for state pension is earned with little or no NIC. The thresholds change each year, so check the current figures before setting the salary.
Employment Allowance and one-director companies
A company whose only employee paid above the secondary threshold is a director cannot claim the Employment Allowance. That often makes the annual scheme the natural choice: there is no allowance to claim monthly anyway.
Bookkeeping
Post the annual payroll journal in the month paid. If the company’s year end falls after the decision to pay but before the payment date, accrue the salary and employer NIC; corporation tax relief needs the pay to be made within nine months of the year end.
Common pitfalls
- Paying the director “a bit extra” mid-year without a payroll run; that is a director’s loan or unreported pay, not salary.
- Forgetting to tell HMRC, which leads to estimated charges for missing months.
- Using a non-cumulative tax code for the annual payment by mistake.
For setting the salary itself, see directors’ salary and paying yourself: salary vs dividends.