Do owner managed companies need to register at HMRC for payroll?

If you are the owner of a small business and you trade through a limited company, it is likely that you are set up with a salary for 2011/12 of around £7,020 per annum (2010/11: £5,700). The remainder of your drawings from the company will then be by way of dividend.

This is good tax planning and ensures that you pay as little tax as possible when corporation tax and personal tax liabilities are combined.

Salaries are set at this level for a good reason: It is the maximum salary that can be drawn such that no tax or national insurance (“NI”) is payable on the salary.

Because there is no tax or NI to pay on the salary, there is no legal requirement to register with HMRC for payroll.

In the past, companies have registered and salaries have been agreed at this level or slightly higher. This was for state pension reasons: Under existing rules, to earn a full state pension on retirement, you must contribute to the National Insurance pot in a minimum number of years over your working life.

Confusingly, the rules are such that at the salaries set out above, you are deemed to have paid NI for state pension purposes even though no NI payment is due. This is good news. However, to guarantee that the NI contribution is registered for state pension purposes, the company needs to be registered.

The administration of payroll costs time and money; therefore in the large majority of cases, the only reason why companies register is to ensure that state pension rights are protected.

What is changing?

In March 2011, Ian Duncan-Smith, the Work and Pensions Secretary, pledged to “fundamentally simplify” the basic state pension, including removing the requirement for a minimum number of contributing years.

Were the legislation to come into force, it would remove the main reason why many small businesses register and therefore suffer payroll administration costs.

Do you need to be registered?

As yet, the reforms have not been put through, so our advice is as follows:

• If your company is registered, now is not the time to change. As and when the new legislation comes into force, we will advise you on whether to deregister. In the meantime, please note that HMRC has tightened its procedures, and it will make quarterly demands for payment, even if you owe no tax.
• If your company is not registered, we advise not Registering immediately if the sole purpose is to protect state pension rights. There is no point in suffering the cost and hassle if the government is about to change the rules. If the rules don’t change, your company will be able register at a later date and you will be able to top up to replace missing years leaving your state pension rights unaffected.

Please note that you should not consider this blog to be structured advice. Please call us to check that the advice holds for your specific circumstances.

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