You’ll need to work out what expenses you have to cover, what tax you owe and what profit your company has made. Then you can look at the most tax-efficient way to pay yourself.
For most small business owners, the best solution is a mixture of salary and dividend, whereby you take your tax-free personal allowance as salary and the rest of your income as a dividend.
In this article, we’ll explain how your dividend income and salary is calculated in relation to the 2021/22 dividend and tax allowance rate.
Personal Tax Allowance and Directors Salary (dividends)
The Personal Tax Allowance (the amount you can earn before paying Income Tax) is £12,570. On top of this, you also receive a £2,000 dividend allowance.
The higher rate tax threshold (the amount at which you start paying tax at 40% or 32.5% on dividends) stands at £50,270.
This means that you can take a basic salary of £8,832 (£736 per month) and dividends of £41,438 before you pay any higher rate tax.
The amount you can take prior to paying tax (as long as you have no other additional earnings taxed or otherwise) is £14,570 for which we recommend a salary of £8,832, plus dividends of £5,738.
National Insurance and Directors Salary
You can also increase your salary slightly, whilst decreasing the dividends which would work out marginally more tax-efficient over a longer period. It does mean paying National Insurance in advance of receiving the benefit, and would generally only be recommended if you have additional employees.
A salary of £9,492 (£791 per month) would mean you make a payment of £97.15 National Insurance in Month 12 (March 2021). This will mean you are slightly better off by approximately £56 over the course of the year. You can take dividends of £40,778 with this salary, before paying any higher rate tax.
If you have other employees or directors, it may be beneficial to take a higher rate of pay as you can claim the employment allowance and not pay any employers NI up to £3,000.
For clients of Clever Accounts, we will contact you before April 20th to provide details of the various options and confirm which salary you want to take for the year. Please get in touch with your dedicated accountant, if you would like to discuss this in more detail.
The tax-free Dividend Allowance of £2,000 will also remain for the 2021/22 and 2022/23 tax years. This means you can receive dividends of £2,000 before they are taxed.
Help in paying yourself
We will provide ongoing advice and support to help you pay yourself in the most tax-efficient manner. Most limited company directors take a mixture of salary and dividend in which case we sort out your monthly PAYE returns and annual P60s. Our online accountancy software will help you manage your cash flow and tell you of available funds that you could extract from your business while ensuring you keep hold of enough money to pay any future tax liabilities. This helps to prevent any nasty surprises!
Changes to the next Tax Year ended 5th April 2023
In his latest budget statement, Chancellor Rishi Sunak has officially confirmed that the Government’s plan to increase NI and dividend tax contributions by 1.25% will take effect from 6th April 2022. The new measure will apply to workers, pensioners and limited company directors.
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It is important to note that your Personal Tax Allowance, i.e. the amount you can earn before paying Income Tax will remain the same. The current rate of your personal tax allowance could further increase by the next budget statement in March 2022 (as it previously has in the past decade). But for now, the £12,570 tax allowance for basic rate taxpayers and £50,270 for the higher rate will not change.
Further guidance on next tax-year’s allowances will be provided in early 2022.