The new tax year started on 6th April with new rates and allowances, and so now is the time for small business owners that trade as a company, to review the way in which profit is taken out from the company for your personal income.
The new personal allowance for 2020/21 remains at £12,500 and the basic rate of tax remains at 20%. The 40% band kicks in at £50k.
The dividend allowance for 2020/21 also remains at £2,000, after which dividends are taxed at 7.5% in the basic rate band. At the higher rate they are taxed at 32.5%.
The employment allowance given to small employers increases to £4,000 – the level of employer national insurance liability, below which none is paid. This allowance only applies to companies with Employees, not just Directors on the Payroll; an important distinction to make!
It remains a generally acceptable tax strategy that a small amount of profit is extracted as a salary, with further profit taken as dividends.
In order to qualify for the full state pension an individual needs 35 qualifying years of contribution. Set at the correct level this can be secured without actually having to pay any National insurance.
This level is to earn between £6,240 and £8,788 per year.
So maximum benefit is achieved with a salary of £8,788 per year or £732 per month.
Even if the individual has already achieved the 35 qualifying years, this is still the most tax efficient rate of payment.
Where the company makes use of the employment allowance and employers National Insurance does not exceed it (£4k) for the year, it is beneficial to pay up to the personal allowance, ie £12,500 per year, £1,042 per month.
This is because although the individual suffers employees National Insurance at 12% of salary above £8,788; this National Insurance can be offset against profit and thus Corporation Tax at 19%.
Where the company payroll is at a level where the Employment Allowance is fully used, the optimal salary falls back to £732 per month.
Where we complete your payroll, we shall set these figures for you in the draft approval payslips we prepare for you in April.
Where you may be at the cusp of employers National Insurance rising above £4k for 2020/21, we will opt a decision, for your confirmation.
If you are interested in finding out more about how Accounting and General can help your business, please call 01803 844425