Most tax effective salary and dividends for 2020/21
Now that we've had Budget 2020 we'll discuss the most tax effective salary and dividends for 2020/21. To find out the best combination for the current tax year read our previous post here.
What are the new rates and allowances for 2020/21?
For the 2020/21 tax year the position for English taxpayers is as follows:
Whilst the 2020/21 tax rates for taxpayers in England Northern Ireland and Wales remain the same, the position is slightly different for Scottish taxpayers as you can see here
What is the most tax effective director's salary and dividends for 2020/21?
It's important to mention that in our article we assume the following:
As a company director, traditionally the most tax effective profit extraction from your company is to take a low salary and the balance as dividends. The benefits of this strategy are as follows:
Tax effective director's salary 2020/21- option 1
If you are able to claim the employment allowance (which is increasing to £4,000) then you may want to pay yourself a salary up to the level of the personal allowance (£12,500). For example this might be the case if you or your spouse work full-time in the business.
However this strategy will only be effective if you haven't already utilised the employment allowance against the NI due on your other employee's salaries.
On the basis you have surplus employment allowance, we recommend you pay yourself a salary up to the personal allowance of £12,500. You can then pay draw dividends of up to £37,500 without paying higher rate tax. (see above).
Using this approach, there will be £3,023 basic rate tax and Employee's national insurance to pay. You can see how this is calculated below:
Using this strategy you'll have net cash of £46,977 (£50,000 less £2,663 and £360) in your pocket after tax.
Your company will also have a corporation tax saving of £2,375 (£12,500 * 19%) with this strategy.
Tax effective director's salary 2020/21- option 2
The second option is to pay yourself a salary is to pay yourself a salary up to the Employer's National Insurance Threshold - for 2020/21 this is £732 a month or £8,784 per annum. Note this is actually less than the Employee's National Insurance Threshold which is £792 per month or £9,500 per annum.
You can then pay dividends of £41,216 without paying any higher rate tax (basic rate band of £50,000 less salary of £8,784).
At this level of dividends you will have basic rate tax to pay of £2,663 calculated as follows:
The net cash you'll receive is £47,337 (£50,000 less £2,663) in your pocket after tax.
The company will have a corporation tax saving of £1,669 (£8,784 * 19%) with this strategy.
The most tax effective salary and dividends for 2020/21: overall
Whilst option two results in more money in your pocket personally, there is a greater corporation tax saving in the first strategy.
So if you take into account the corporation tax saving when taking a higher salary, you would be better off by £346 if you choose the first option.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].