If you’re a director of a limited company, and you’ve paid your taxes, chances are that you want to invest your dividends in other opportunities. With cash in hand, imagine the opportunities that will come your way. If you’re looking forward to knowing more about minimum wage, personal allowance and tax rates, dividends allowance and tax rates, employment allowance and N.I threshold, Optimum Director Salary 2020/21 for Director Companies with one employee for companies for more than one or two employees, this article is for you.
What are the dividends?
‘Dividends’ is the name given to capital being paid out to investors holding stock in a company. Dividends are the allocation of remaining income after tax for business. You should take profits as a form of remuneration, as a shareholder. Dividends pay your earnings accordingly.
Optimum Director Salary and Dividends 2020/21
The Optimum Director Salary 2020/21 will be £8,788 per annum, or £732 per month, or £169 a week. For most owners, This is the most tax-efficient rate to pay themselves. If you’re the owner of a limited company, you can guarantee maximum wage and dividend rates. Below is further detail:
1. Minimum Wage
On 1 April 2020, the National Minimum Wage and National Living Wage rates for all age bands and for apprentices have increased. The following rates will be applicable from 1st April 2020.
Aged 25 and over – £8.72
Aged 21 to 24 – £8.20
Aged 18 to 20 – £6.45
Under 18 – £4.55
Apprentice – £4.15As
some of you will have employees on an hourly basis. Therefore the next payslip we generate will have an updated (April 2020) hourly rate.
2. Personal Allowances & Tax Rates:
For 2020/21 the personal allowance has remained at £12,500, which means your first £12,500 of income is tax free. For income above this the tax rates are as below (these do not apply to dividends which we discuss after this):
£12,500 to £50,000>> 20%
£50,000 to £150,000>> 40%
£150,001 + >> 45%
Scottish resident tax payers have slightly different tax bands for 2020/21, here:
£12,500 to £14,585>> 19%
£14,585 to £25,158>> 20%
£25,158 to £43,430>> 21%
£43,430 to £150,000>> 41%
£150,000 +>> 46%
There are further thresholds and tax issues to be aware of but we’ll keep it simple for this newsletter.
3. Dividends Tax & Allowances:
The dividend allowance remains at £2,000 (same as 2019/20) – this means the first £2,000 of your dividends are tax-free. Over and above this £2,000, the dividend income is taxed as follows:
- If you have any un-used personal allowance (£12,500), that element is tax-free
- Any dividends in the basic tax band (up to £50,000) attract a tax charge of 7.5%
- Dividends above the basic tax band (over £50,000) are charged at 32.5%
- Any dividends in the upper tax band (£150,000+) are taxed at 38.1%.
As an example, if your only income was dividend income, you could receive £14,500 of tax-free dividend income in 20/21. This is due to both your £12,500 personal allowance and also the £2,000 dividend allowance.
4. Employment Allowance & N.I Threshold:
The introduction of the employment allowance in April 2014 enabled employers not to pay the first £4,000 of employer’s national insurance.
It means you’ll pay fewer employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner).
Typically the employment allowance means that it is the most tax-efficient directors salary 2020/21 to the tax-free personal allowance level (£12,500 for 20/21). HMRC announced that from 2016/17, the employment allowance would not be available to companies where the only person on the payroll is a director, i.e., ‘single director employees’ limited companies.
Therefore, the optimal director’s salary 2020/21 will depend on whether or not the employment allowance is available.
As always, we would advise that you discuss your specific circumstances with a professional or us before taking any action, here are some key assumptions we have made in this Newsletter.
- You are a UK resident taxpayer with a standard personal allowance.
- Your only source of income is your salary and dividends from your limited company.
- There are other potential taxes affecting issues that we have not covered in this article, including student loan repayments, child benefit high-income tax charge and the withdrawal of the personal allowance once your income exceeds £100,000
- You are not working inside IR35.
When it comes to tax-efficient salary levels for 20/21 there are now three national insurance thresholds you need to be aware of:
- Lower Earnings Limit – as long as you pay a salary above this, you are protecting your entitlement to future state pension and benefits without paying any national insurance. For 20/21 this is £520 per month, £6,240 for the year.
- Primary Threshold – if you earn above this you have to start paying national insurance – for 20/21 this is £792 per month, £9,500 for the year.
- Secondary Threshold – if you earn above this your business has to start paying national insurance – for 20/21 this is £732 per month, £8,788 for the year.
A major change for the 20/21 tax year is that the Secondary Threshold is lower than the Primary Threshold – this means that the optimum level for the purposes of this article is to go up to the Secondary Threshold but not any higher.
5. Optimum Director Salary For Sole & Only Employee of the company – Employment Allowances not available.
Traditionally, if you are the director of an owner-managed company, you would pay yourself a small salary, which is just enough to maintain your National Insurance Contribution records and to extract profits above that level as a dividend. To ensure that the year counts for contribution purposes, the salary needs to be at least equal to the lower earnings limit for Class 1 National Insurance contributions (NICs). For 2020/21, this is set at £120 per week – equating to an annual salary of at least £6,240 for the tax year.
Based on the threshold set by HM Revenue & Customs, your salary should be up to the primary N.I.C threshold. Therefore, Being a sole Directors & Only employee of the company, we suggest a monthly gross salary of £790.00, which means your yearly salary will be approx £9500.00 a year ( rounded to nearest hundred)
Please note, as a sole director it will attract employer N.I contribution of £98.25 per year (£9,500-8,788)*.13.8%. That you will have to pay to HM Revenue & Customs.
The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,805.00). ([email protected]%)
The other option is to take a gross monthly salary of £730/month, which does not attract any tax or N.I contribution. This will give you a yearly salary of £8760.00.
The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,664.00) ([email protected]%)
Based on the above, overall paying employer N.IC of £98.25, will save you £42.75 a year (£1,805-£1,664-£98.25)
Please note, Transfers for dividends into your personal account should always be made separately from salary payments with reference
6. The employment allowance is available – where a company has more than one employee
This will be the case if there is more than one employee (or the only employee is not also a director). It is assumed that the employment allowance is not fully utilized elsewhere (if you have other employees whose salaries use the entire benefit, then you want to pay yourself the figure from scenario 1).
The availability of the employment allowance makes it beneficial to pay a salary equal to the personal allowance – £12,500 for 2020/21. Although the employee’s NIC is payable on the wages in excess of the threshold (£8,788), the employer’s NIC liability that would otherwise arise on the salary over £8,788 (i.e. £512.25 being 13.8% of £12,500 – £8,788) is covered by the National Insurance employment allowance.
At a salary of £12,500, employee N.I.Cs of £360 (12% (£1,2500 – £9,500) is payable.
However, as salary is deductible for corporation tax purposes, the additional salary of £3,830 (£12,500 – £8,760) paid in excess of the threshold saves corporation tax of £727.70 (£3,830 @ 19%). This more than outweighs the employee’s NICs of £360, generating an overall saving of £367.70.
It is not worth paying a salary over the personal allowance even if the employment allowance is available. Any salary above the personal allowance will be taxable and the combined effect of tax at 20% and employee’s National Insurance at 12% will outweigh the corporation tax saving of 19%.
If you have more than one employee, we suggest a monthly gross salary of £1041.67 per month, which means your yearly salary will be £12,500.00 a year.
Dividends don’t count as business costs towards your corporation tax calculation, but shareholders may have to pay income tax if the payment they receive exceeds the dividend allowance. With regards to dividends, assuming you wish to take dividends up to the higher tax band but no further, then this would leave you with £40,500 of dividend headroom (£50,000 higher tax band – £9,500 salary).
The personal tax on dividends of £40,500 would total £2,663 – this is calculated as below:
- £3,000 of the dividends are in the tax-free personal allowance (£12,500 less £95,00 salary)
- £2,000 of the dividends are in the tax-free dividend allowance
- This then leaves the balance of dividends totaling £35,500 to be taxed at 7.5% = £2,663
- In a nutshell, if you take salary & dividends at the basic rate tax band, your personal tax liability will be £2,663 on a combined income of £50,000.
Kindly Act Now:
Kindly ensure, you change the standing order for the director’s salary if you were taking a different salary last month (or last tax year). You will be taking a new salary, according to the suitable options explained above. Furthermore, kindly confirm to your payroll/account manager what option you are going for so that we can run April 2020 payroll smoothly without any interruption.
Should you wish to take more salary from the company, you can do that. It may attract some tax & national insurance contributions.
Important note: Kindly ensure you transfer the correct salary every month from your business to your personal account.
Please feel free to contact us if you have any questions or need further information.