Tax Efficient Salary & Dividends 2021

Small-business owner-managers

Do you want to know how to draw £50,000 from your company and pay just £2,663 in tax and NI whilst saving £1,726 in corporate tax?

Or even better, do you want to know how to draw £50,000 from your company and pay just £3,023 in tax and NI whilst saving £2,375 in corporate tax?

Here is an easy to understand explanation to show you How to take a Tax efficient salary and dividend in 2021/22? 

It’s applicable for England, N Ireland and Wales, but Scotland is slightly different

Tax Efficient Salary & Dividends 2021/22

As a director shareholder of your own company, it is important to understand how best to withdraw funds from the company whilst incurring as little tax liability as possible. The best way of doing this is to understand what tax-free allowances you are entitled to and at what point you will pay higher rates of tax.

The important numbers for 2021/22 are as follows:

  • The tax-free personal allowance – £12,500
  • The tax-free dividend allowance – £2,000
  • The basic rate threshold – £50,000

The following assumes that you own and run your own limited company and have no other income in the tax year 2021/22.

At the basic rate, salary is taxed at a higher rate of tax than dividends (20% as opposed to 7.5%), so the best thing to do with regards to taking a salary, is to take no more than your tax-free personal allowance of £12,500. Considering that the employees and employers’ national insurance annual thresholds have both increased to £9,568 and £8,840 retrospectively, it is, therefore, advisable to take a monthly salary of £800 per month (£9,600 per annum).
As directors only start paying national insurance contributions once they have exceeded the annual threshold, you will need to pay HMRC a small amount of £3.84 for employee’s national insurance contributions within your final payslip of the 2021-22 tax year which will contribute towards your 35-year national insurance record for entitlement to receiving the basic state pension alongside a larger amount of £104.88 for employer’s national insurance. Although the total overall amount liable for national insurance is £108.72, receiving £800 per month is still the most tax-efficient salary for yourself as a director to draw from the company.
It is advisable to use up the rest of the £50,000 basic rate threshold by taking dividends if the company profits allow. The first £2,000 of this is tax-free because of the dividend allowance, and then 7.5% tax for anything after this, up to the threshold.
If you exceed the threshold, you then enter into paying higher rates of tax which would be 40% on salary and 32.5% on dividends.
Using this method, you can take £50,000 out of the company in the year with a personal tax bill of £2,662.50

Personal Allowance-9,600.00-2,900.00-12,500.00
Dividend Allowance-2,000.00-2,000.00
Taxable Income35,500.0035,500.00
Tax on dividends at 7.5%2,662.50

Book a free 15-minute call and ask us to run a review of your current position to see if we can help you.

Jo-Gilbert-Blog-PJCO-Peter Jarman
Jo Gilbert

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