As in previous years we’ve set out what we believe to be the most common optimum, then end with a few exceptions. Just to clarify the below are suggestions for the tax year starting from 6 April 2021, and assume any company work done is outside IR35.
The “most common” situation:
We have opted for a salary that will trigger some employer NICs, but not employee NICs. Whilst paying over this employer NIC liability will be a small extra hassle, it’s just one extra company payment shortly following the tax year end. By our calculations this will save clients a little over £50 for the year overall, so for a trivial extra task that we’ll highlight how and when to do, we believe it’s worthwhile.
For one person companies in 2021/22, we therefore recommend a salary of £797/month. This replaces £791/month for 2020/21. It’s the maximum before employee NICs actually become payable, yet is still sufficient to count as a contributing year towards basic state pension. Be aware there will be a small amount of employer’s NICs payable on this salary shortly following the tax year as mentioned above.
On the basis of that salary (so £9,564 for the year) and no other personal income, you can take dividends of:
– £5,006 and suffer no personal tax (0%)
– £40,706 (ie an extra £35,700) and suffer £2,677.50 personal tax (£35,700 at 7.5%)
– £90,436 (ie an extra £49,730) and suffer £18,839.75 personal tax (the above £2,677.50, plus £49,730 at 32.5%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (ie the amount of tax suffered on each extra £ of dividend taken). Above the top limit you start to lose your personal allowance so the effective tax rate becomes increasingly penal.
– 2+ staff – for those with 2+ people on the payroll but overall very modest salaries (so £4k employment allowance won’t be fully utilised) and preferring tax savings over simplicity, you may choose to opt for the slightly higher salary of £1,047/month (up from £1,041 from 2020/21 as personal allowance marginally increased). This will incur employee NICs, but still no PAYE as under the personal allowance, and the employment allowance will negate the employer NICs. In practice this will save a couple of hundred quid over the year, but be aware staff net pay won’t consistently equal their gross pay, so there will be deductions to pay over to HMRC. Please also note this extra £3,000 salary over the year impacts on the dividend thresholds, so basically £2k tax free, £35.7k basic rate (£37.7k total dividends), £49,730 higher rate (£87,430 total dividends). If in doubt, just go for the lower £797/month.
– Student loans/higher income child benefit charge – these aren’t really exceptions as such, but things to be aware of that can increase what you have to pay. If you have an outstanding student loan or claim child benefit, and your total overall income is above the thresholds, then there will be additional charges of loan repayments and/or having child benefit clawed back. For higher income child benefit this is £50,000. For student loans it depends on the plan:
– plan 1 – £19,895 (9% on earnings above this).
– plan 2 – £27,295 (9% on earnings above this).
– plan 4 – £25,000 (9% on earnings above this).
– postgraduate loan – £21,000 (6% on earnings above this).
If you don’t want to be overly concerned with the precise details, then the general logic isn’t surprising. In the vast majority of situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. If for example you went £10 into the higher rate band, it just means that top £10 of your income would suffer 32.5% instead of 7.5%. There’s no sudden sting for going pennies above a threshold.