The personal allowance remains at £12,500 during the 2020-2021 tax year, meaning your first £12,500 of income is tax free.
The tax bands and tax rates for the 2020-2021 tax year are:
20% – income between £12,500 and £50,000 (basic tax rate bracket)
40% – income between £50,001 and £150,000 (higher tax rate bracket)
45% – income above £150,001 (additional tax rate bracket)
There is no change to the dividend allowance, this remains at £2,000. This means that your first £2,000 of dividend income is free.
Any dividends over £2,000 will incur tax at the following rates:
Dividends falling within the basic tax rate – 7.5%
Dividends falling within the higher tax rate – 32.5%
Dividends falling with the additional rate of tax – 38.1%
If you have any unused personal allowance from your £12,500 annual allowance, then the remaining element can be allocated against your dividend income, that element of dividend income is then tax free. For example, if you take a salary of £9,500 in the 2020-2021 tax year, you will have £3,000 remaining from your personal allowance. The £3,000 can be offset against your dividend income, giving you a further £3,000 of dividend income free of tax.
The Employer’s Allowance (note, this is for employers and not employees) continues for companies employing staff, enabling your company to reduce its annual national insurance bill by £4,000, increasing from last year’s allowance of £3,000. This means that employers do not pay the first £4,000 of employers national insurance contributions.
From April 2020, you will need to make extra checks to confirm your eligibility to claim the Employer’s Allowance.
Where a limited company has two directors, possibly spouses, providing both are paid above the secondary threshold (£8,788 2020-2021), the company is eligible to claim the Employment Allowance for the tax year.
Sole director companies without additional employees cannot claim the Employment Allowance.
The Lower Earnings limit increases from £6,136 to £6,240 in 2020-2021. At this level of earnings, you are protecting your entitlement to state benefits such as a pension, but you do not have to make any national insurance contributions.
The primary national insurance threshold increases to £9,500 from £8,632 for the year from April 2020. If you earn above this amount, you are personally liable to pay national insurance contributions.
The Secondary threshold increases from £8,632 to £8,788. If you earn over this threshold then your employer will pay employer’s national insurance on your earnings.
A major change in 2020-2021 is that the secondary threshold is lower than the primary threshold. Therefore, as a Director, you can potentially earn a salary of up to £9,500 per year (£792 per month) but your company will then become liable to pay employer’s national insurance contributions of just under £100 for the year which will need to be paid to HMRC.
If you’re eligible to claim the Employers National Insurance Allowance, your company won’t need to pay the £100 national insurance contributions.
In this instance, our recommendation is to pay an annual salary of £9,500 per year as you’ll have an extra £712 in your own pocket and the company will also save around £150 in corporation tax for the year.
Companies who are not eligible to claim the Employers National Insurance Allowance may decide that the admin burden of having to make such a small payment of national insurance to HMRC may outweigh the saving, which is small. Therefore, opting for a salary of £8,788 per year (£732 per month) will avoid any national insurance issues. Your take home salary is £60 less a month but you don’t have to worry about remembering to pay the employers national insurance contributions to HMRC.
Unsure of your optimum salary level?
Every client has different tax affairs so please get in touch if you’d like a personalised calculation specific to your own circumstances.