How to pay yourself tax efficiently from your Ltd Company 2020-21 - Salary & Dividends

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🔴 The TAX EFFICIENT way in 2020-21 to pay yourself from your Limited Company is with an optimal salary and dividends. In this video, I recommend the most tax-efficient director's salary and dividends up to £50,000 per year.

You can pay yourself up to £50,000 per annum personally from your UK limited company in the 2020 to 2021 tax return year and pay a rate of personal tax of just 7.5% or less.

Your personal tax bill could be as low as £2,662.50 per year.

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Your salary and dividends must be declared on your personal (self-assessment) tax return and are time sensitive, so pro-active planning can potentially save you £000's and avoid unnecessary headaches if you find yourself in a reactive situation.

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⏱️TIMESTAMPS⏱️
0:00 - Introduction
1:27 - Tax efficient salary and dividends - the basics
7:43 - Strategy 1 - Personal allowance level
11:17 - Strategy 2 - National Insurance level
14:30 - Dividend tax % on income above £50,000
15:40 - Conclusion and Outro

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🔴 CORPORATION TAX
In the UK for the 2020-21 company year is set at 19%. There are ways of paying a reduced average corporation tax rate and this is something we are happy to discuss with you.

🔴 INCOME TAX
Is payable on a director salary, through the PAYE (Pay As You Earn) System. This is different from dividend tax, which as the name suggests is payable on dividends extracted from your company.
The income tax personal allowance in 2020-21 is £12,500, although there are various personal allowance thresholds dependent upon your circumstances.

The income tax thresholds are:

🟢 Basic rate = £12,501 to £50,000 (20%)
🟢 Higher rate = £50,001 to £150,000 (40%)
🟢 Additional rate over = £150,000 (45%)

🔴 DIVIDENDS and DIVIDENDS TAX
Are payable from net profits after tax of the current year + prior year reserves. Now, this may sound complicated, but it's really not that complex. Dividends are only payable to shareholders, and quite often directors and shareholders are one of the same, but not always. Dividends are payable in proportion with your shareholding, and the type of shares you hold.

The tax-free dividend allowance for 2020-21 is £2,000.

The dividend rates for the 2020-21 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%)

🔴 NATIONAL INSURANCE
Is perhaps the trickiest aspect of an optimal director salary and dividends to navigate. However, don't get too bogged down with national insurance as it's the least material item.

The Lower Earnings Limit (LEL) threshold is the point at which you qualify for state benefits such as your pension. So it's important to pay yourself at or above this level every year to qualify for a state pension credit.

🟢 £120 per week
🟢 £520 per month
🟢 £6,240 per year

Class 1 National Insurance Primary Threshold is applicable to employees and is when as an employee you start paying class 1 national insurance.

🟢 £183 per week
🟢 £792 per month
🟢 £9,500 per year

Class 1 primary threshold is levied at 12% between £9,500 and £50,000, and anything over that is levied at 2%.

Class 1 National Insurance Secondary Threshold is levied on the employer (your limited company) at the following rates:

🟢 £169 per week
🟢 £732 per month
🟢 £8,788 per year

The class 1 secondary threshold does not have an upper limit so anything over £8,788 is taxed at 13.8%.

🔴 CONCLUSION - SALARY v DIVIDENDS
There is no right or wrong way as to how you should pay yourself an optimal directors salary and dividends through your Limited Company. My video gives you a couple of strategies you can adopt with tax efficiency in mind. Tax efficiency may not be your only objective.

🔴 DISCLAIMER
My videos are for general guidance, education and empowerment in helping you understand accounting, tax and your numbers.
They in no way constitute specific advice to your specific circumstances. Me & my team would be delighted to help you with your specific queries or accounting requirements through a formal engagement.
#directorssalary #salaryvdividend #dividends

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