The Corporation Tax threshold in the UK for 2020/2021 is 19% – this is the same as last year. There were plans to reduce this to 17%, however, in a recent budget, the government abolished this reduction so the corporation tax rate will continue at 19%.
Income Tax is paid on your salary excluding any dividends, the tax-free personal allowance for this year is £12,500.
The income tax bands are:
- Basic rate = £12,501 to £50,000 (20%)
- Higher rate = £50,001 to £150,000 (40%)
- Additional rate over = £150,000 (45%)
There are three National insurance thresholds that you need to be aware of when paying yourself as a business owner.
The Lower Earnings Limit (LEL) threshold is the point at which you qualify for state benefits such as your pension. As long as you pay yourself above this threshold then you will get your pension token every year.
- £120 per week
- £520 per month
- £6,240 per year
The National Insurance Primary Threshold is when as an employee of your Ltd company you start paying employees NI.
- £183 per week
- £792 per month
- £9,500 per year
The primary threshold is taxed at 12% between £9,500 and £50,000, and anything over that is taxed at 2%.
The National Insurance Secondary Threshold as your Ltd company (the employer) begins paying employers NI.
- £169 per week (was £166)
- £732 per month (was £719)
- £8,788 per year (was £8,632)
The secondary threshold does not have an upper limit so anything over £8,788 is taxed at 13.8%.
Dividends can be explained quite easily, they are only payable from current profits or retained profits from previous years and are only payable to shareholders.
The tax-free dividend allowance for 2020/2021 is £2,000.
It is also possible to draw additional tax-free dividends if you haven’t used up your personal tax allowance with your salary.
For example, if you pay yourself a basic salary of £8,000, that leaves £4,5000 unused from your personal allowance – this can instead be drawn as tax-free dividends.
The dividend rates for this year are:
- Basic rate = £14,501 to £50,000 (7.5%)
- Higher rate = £50,001 to £150,000 (32.5%)
- Additional rate over = £150,000 (38.1%)
In 2020/2021 you can earn £14,500 tax-free (£12,500 personal allowance plus £2000 dividend allowance), however, do not pay yourself £12,500 as a salary due to the double National Insurance liability.
The optimal way to pay yourself is a salary that is just under the National Insurance secondary threshold and then draws down the rest as dividends.
With this in mind, my recommend directors salary for a sole director with no other employment for 2020/21 is as follows (based on a £40,000 pay example):
- Recommended Salary: £732 Per Month / £8784 Per Year
(just under the £8788 NI secondary threshold but above the LEL threshold to qualify for benefits e.g. state pension)
- Dividends: From £8784 to £14500 = £5740 @ 0%
- Dividends: From £14500 to £40,000 = £25,500 @ 7.5%
- Total Dividend Tax = £1,912.50
Dividends vs Salary
Depending on your personal situation it can sometimes be more beneficial to pay the full salary via PAYE instead of paying yourself dividends, however, in most cases, it is more tax-efficient to pay yourself a basic salary and dividends as it avoids the double National Insurance liability of employers and employees NI that PAYE causes.