As the country gears up for lockdown easing, and the ability to finally have a BBQ and a beer with friends/family from the 12th April, we can now look forward to the rest of 2021. Please take five minutes to read through this, as there are points about the dividend and salary split which can help you and your company.
What you need to know about the 2021/22 Salary & Dividend split
As of 6th April, we enter a new tax year. This means we must start planning in terms of tax savings. For the 2021/22 tax year, the personal allowance will increase to £12,570 (an increase of £70).
With regards to dividend income, there will remain a tax-free allowance of £2,000 per annum. Any dividends over this £2,000 will then be taxed at 7.5% (if no personal allowance left and within the basic rate band – up to £50,000) and then a higher rate of 32.5% after this.
How much salary should I take?
Most sole directors will choose to take just enough salary to earn their National Insurance “stamp”, with any additional funds taken from their company as dividends. How much you take will depend on whether you can claim the employment allowance (£4,000).
If you are a sole director with no other employees, then you cannot claim this allowance. If you have more than one person on the payroll, then it is likely you can claim the allowance, but not definite, so please check with us first.
The information below is based on the following assumptions:
- You are UK resident and have no student loan balance
- Your only income is from your Company
- You have a standard personal allowance and have profits in your Ltd Co to take
I can claim the employment allowance
If you can, then the optimum salary level to take is £12,570 per annum (£1,047.50 per month). This will not attract any income tax but will incur some employees NI.
I cannot claim the employment allowance
If you are a sole Director with no employees, then the optimum salary level for you could be £8,820 per annum (£735 per month). This would leave £3,750 personal allowance left to take as dividends tax free, plus the £2,000 dividend allowance, meaning total dividends of £5,750 tax free dividends.
If you then only want to take further dividends up to the higher rate band, you could take a further £41,450 at the basic dividend rate of 7.5%. See below:
Total income would be £50,270
Salary of £8,820 – no tax
Dividends to PA – £3,750 – no tax
Dividends of £2,000 – no tax
Further dividends of £35,700 at 7.5% – total tax £2,677.50
Please note: At the above salary levels, obviously this does not meet the minimum wage rules. Therefore, the salary will have to be classed as earned from Director’s duties, and not contracted employment duties.
Other tax planning ideas
- It may be possible to transfer a minority shareholding to your spouse, so they can also make use of their annual £2,000 dividend allowance
- Increase Company pension contributions: these will be an allowable tax deduction for your Company. Annual pension contribution allowance is £40k.
- Claim a “use of home” allowance: this can still be done when running an Ltd Co.
- Have a simple rental agreement in place
IR35 update
Some of you may have heard of IR35. If you run a Company, but essentially just use the Company to work for one end customer, this section applies to you, especially contractors/freelancers.
From April 2021, sweeping changes will come in to play here. At that point, it will be down to the customer/end client to make the decision as to whether you fall within IR35 or not. If they decide you are within it, you will invoice them as normal, but they will start to deduct tax and NI as though you were an employee and pay you over the net amount.
One of the key exceptions to the IR35 changes in April 2021 is if your client is in the private sector and is classed as a ‘small business’. In these circumstances, the IR35 changes will not apply, and you will need to continue assessing your own IR35 position.
For a client to qualify as a small business it must meet at least two of the below three conditions:
• turnover of £10.2m or less;
- £5.1m or less on its balance sheet;
• 50 employees or less.
HMRC have now confirmed another key exception to the IR35 changes – if your client is a wholly overseas organisation with no UK presence then the old IR35 rules will continue to apply.
If you have any questions, please do get in touch.
Auto-enrolment pension rates
From 6th April 2021, if you have an auto-enrolment pension scheme for your company (i.e. if you employee staff who fit the criteria) the contribution rates will not change and continue at a minimum of 8%:
- Employer minimum = 3%
- Employee minimum = 5%
New minimum wage
From 6th April 2021, the new minimums will be:
- Living Wage (23+) £8.91
- 21-22 Minimum wage £8.36
- 18-20 Minimum wage £6.56
- Minimum wage under 18 £4.62
- Apprentice £4.30
Additional services
To help clients further the financial life, as well as their business, we have a variety of services for you including:
- Bookkeeping/VAT Services: If you currently do this yourself and want to just pass on the burden, we have affordable monthly plans to take this off your hands
- Management reports & meeting: monthly or quarterly, we will prepare full management accounts & reports, and meet with you to discuss results, ensuring your business is on track, and tax planning is done during the year
- Xero health check service: for those of you who do your own bookkeeping on Xero and want quick, one-off peace of mind that it is correct
- Budgets/forecasts: Do you constantly find you run out of cash and need to know why? Do you have expansion plans, or considering employing someone? Knowing if the Company can afford it is key!
