Commentary

By Catherine,

PAYE is killing your business

PAYE is a tax on employment and if you run a business where your team is as much a part of making things happen as you are, then PAYE is killing your business.

Paying tax as you earn is a minimum of 42.8 % and can be as much as 53.8%

It is broken down in to three different parts:
  • Income tax
  • Employee’s National Insurance
  • Employer’s National Insurance
While there’s no doubt that Employer’s NI is a tax on the employer, the other two are technically liabilities of the employee – paid by the employer. However, from the conjoined perspective of the business owner and the team member, this money has to be paid to the government as a result of someone joining the team.

Over half of what you pay your team goes to the government

For most owners of independent businesses, when you decide to bring someone new onto the team, from the very first day that they start work, around half of what you pay them goes to the government. If this wasn’t the case, either you would be spending less, or they would be being paid more, or more likely a bit of both. People look for jobs that promote a ‘salary’ gross of tax but live in the real world and manage their finances on cash. At the end of the day it’s what’s in your pocket, and your team’s pockets, that matters. But, think about this for a second – if you were to rub out your current business structure and go back to the drawing board, start from scratch and draw a new structure, now, with all of the key members of your team, on whatever terms you agree and where nothing goes to the government until you make a profit… Hold that thought. We’ll come back to it in a minute.

PAYE is a tax that slips past us, unnoticed

So, PAYE is a tax on employment. It is therefore completely contrary to the government’s supposed aspirations to increase employment. However, it is a very convenient way to collect tax. It’s almost through the back door, under the radar, it slips past us, unnoticed. The employer thinks that the employee is paying it but, in reality, it’s an expense to the business – it’s a cost of employing people. Here’s the thing – employment, as a concept, belongs properly in the 19th century anyway. Back in the days of the mill, factory and mine owners, you had one big owner and lots of workers, clocking in and clocking out, collecting their brown paper envelopes and the end of the week for the hours that they were physically labouring. But we know that people who work in the modern world simply don’t behave like this. In this day and age, people who behave like old-fashioned employees are the ones who end up unemployed…or working for some god-awful government department or as a minion in a big corporate – which is effectively the same thing as being unemployed. These days people work in teams. People are working towards a vision or a dream or simply a plan that they bought into. They don’t watch the clock waiting to go home, they watch the clock to make sure that they meet deadlines and promises. This isn’t slave labour or the ‘bosses’ wanting their pound of flesh. It’s about an individual being connected to the overall ambition of the business and wanting to make it happen. To deliver.

Businesses should only be paying tax when they make a profit

Early stage, businesses that are growing and investing or businesses that have had a bad year should simply not be paying money out in tax that they can’t afford. It’s bad for business and if you are doing it, it’s killing your business. Partnerships get everyone focused on profits. They don’t pay PAYE and they only pay tax when they make a profit. We think partnerships are great structures for modern businesses and definitely worth considering. One quick tip, use an LLP to make sure that you are de-risked. Quotes from David Cameron:
Small businesses and entrepreneurs are the lifeblood of the British economy and I am determined that we, working with the private sector, do everything we can to help them to start up and to grow.
“I want to encourage people to go for it and make this the year of enterprise – whether that is fulfilling their dream of starting a new business or taking the leap to grow their business, to employ more staff, or to start exporting.”
Yep. We agree with you. Can you please let the folks at HMRC in on your plan too though….

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