2020/21 - salaries, dividends and the best mix for you

analysis-1841158__340.jpgWith the new dividend rules, and new guidance from HMRC on what does and doesn't qualify for the Employment Allowance, the whole situation for one-person and small businesses operating as a limited company paying Corporation Tax is quite complex. Here's our guidance and ideas. We hope it helps!

Step 1:

how many employees does the Company have who earn above the Secondary Threshold for Class 1 National Insurance contributions ( for 2020/21 this is £732 a month or £8,784 per annum - see our tax tables).

If the answer is just one (i.e. yourself) and you are a Director of the Company, then the Company can't claim the Employment Allowance, so you need to be on the LEFT side of the screen from here on in. If the answer is either (i) one, but that person isn't a Director, or (ii) more than one, then you are on the RIGHT side of the screen from here on in. If you want to see the detailed guidance HMRC issued on this, check it out here.

Step 2:

Decide what salary to take:

If any of these apply;

  • only one employee (or director) in the limited company is paid above the Secondary Threshold, and that employee is a director of the limited company OR
  • you employ someone for personal, household or domestic work (like a nanny or gardener) - unless they’re a care or support worker OR
  • you’re a public body or business doing more than half your work in the public sector (such as local councils and NHS services) - unless you’re a charity

then your company is not eligible for Employer's Allowance - which means the company will need to pay Employers National Insurance on anything above the Secondary Threshold.

You will therefore be better off if you limit your salary to the Secondary Threshold (i.e. £8784) and take dividends for any income above this.

If

  • you have more than one employee earning above the Secondary Threshold OR
  • you have one employee paid more than the Secondary Threshold but who is not a Director AND
  • your employee is not someone for personal, household or domestic work (like a nanny or gardener) - unless they’re a care or support worker AND
  • you’re not a public body or business doing more than half your work in the public sector (such as local councils and NHS services) - unless you’re a charity

you are eligible for the Employment Allowance which means you can claim up to £4,000 (2020/21) off your Employer NI contributions.

If this applies, you're better off taking the full tax free allowance as salary - which for 2020/21 is £12,500.  However, this is only true if you can't use the Employment Allowance to offset NI payments due on the salaries of other employees.  If this is the case, you may be better opting for the lower salary outlined on the left.

Step 3:put cash aside

Pay anything above your salary as dividends. The dividend allowance for 2020/21 is £2,000. This means that you personally won't pay tax on the first £2,000 of dividends from your Company; however, bear in mind that Corporation tax for the Company is calculated BEFORE dividends are paid, so the tax for the company of dividends is 19% (2020/21).

In addition, there are personal taxes to pay on any dividends above the £2,000 allowance. See the tax tables for details.

Step 4:

Make sure you put money aside for your personal tax and also within the Company for your Corporation tax. You'll be paying PAYE and any NI monthly, but if you're a Director you must submit a self assessment which will give a full account of income and tax paid for you personally. We can help with

  • estimating the tax you'll need to put aside and
  • calculating and submitting personal self assessment tax returns and corporation tax returns.