15 Apr Optimum Director Salary and Dividends 2020/21
- Minimum Wage
- Personal allowances & Tax Rates
- Dividends Allowances & Tax Rates
- Employment Allowances & N.I Threshold
- Optimal Salary for directors – Companies with one employee
- Optimal Salary for directors – Companies with two or more employees
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 to not pay the first £4,000 of employer’s national insurance.
It means, you’ll pay less 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 slightly more tax efficient to take a gross salary all the way to the tax free personal allowance level (£12,500 for 20/21), however 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 employee’ limited companies.
Therefore, the optimal salary of 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 us or a professional before taking any action, here are some key assumptions we have made in this Newsletter.
- You are a UK resident tax payer with a standard personal allowance
- Your only source of income is your salary and dividends from your limited company
- There are other potential tax 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 of IR35
6. 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 utilize the entire allowance, 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 salary in excess of the threshold (£8,788), the employer’s NIC liability that would otherwise arise on the salary in excess of £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 in excess of 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.
Dividend’s 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).
- £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 totalling £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 ensure, you change the standing order for director’s salary if you were taking a different salary last month (or last tax year). You will be taking 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.
Important note: Kindly ensure you transfer the correct salary every month from your business to your personal account.