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How to Pay Yourself as a Ltd Company - Directors Salary 2021/2022 - Dividends vs Salary UK - YouTube
Channel: Accounting and Tax Academy by Tony D
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the uk budget 2021 was presented on the
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3rd of march 21
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and if you're an individual uk taxpayer
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or an owner of a small business whether
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it be a limited company llp
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sole trader or partnership then stay
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tuned in this part 2 of our uk budget
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2021 special series
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we are going to do a deep dive into the
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income tax rates and thresholds for the
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2122 tax share
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the full suite of personal allowances
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available to you
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national insurance rates and thresholds
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dividend rates and thresholds
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and finally helping you decide a tax
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optimal director's salary and dividends
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in the 21-22 tax year this video is
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positioned to help you do some tax
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planning in advance for the 21-22 tax
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year
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that starts on the 6th of april 2021
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through to the 5th of april 2022 and
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we've prepared a comprehensive handout
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that we'll be referring to throughout
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this video
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so before we start take a pause and
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download a digital copy instantly using
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the link in the description box below
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before i get into today's video be sure
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to hit that subscribe button as well as
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the notification bell to make sure
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you're kept up to date
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with all of our latest content this
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really helps us to produce more helpful
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videos and to get you real quality
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advice from
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real qualified accountants
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[Music]
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so let's begin with income tax rates and
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thresholds on page two of our handout
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to be clear income tax applies to your
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employed earnings
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that is pay as you earn and if you are a
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self-employed sole trader or partnership
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on your taxable profits income tax rates
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differ from dividend tax rates which
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we'll cover later on
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there are different rates if you are in
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england wales and northern ireland
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compared to
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scotland starting with england wales and
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northern ireland you will see the actual
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income tax rate of 20
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40 and 45 respectively have not changed
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in the uk budget of 2021
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the thresholds have increased ever so
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slightly so now you as a uk tax resident
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individual can earn up to 12
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570 pounds per annum tax free an
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increase of 70 pounds on
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the 20 to 21 tax year there is still the
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zero percent starting rate for
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savings this simply means if you have
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earned up to 5 000
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pounds in gross interest off your
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savings then this interest will not be
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taxed it is standard practice for banks
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and building societies to pay you gross
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interest on your savings
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but beware it is only really useful if
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you have no or low non-savings earnings
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such as a salary
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before we continue with today's video
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we're thrilled to be launching the
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accounting and tax academy
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membership site this year we'll be
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posting downloadable resources
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tax tutorials and exclusive courses that
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you won't find
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anywhere else and the best part of it is
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it's absolutely free to join
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head to the link in the description box
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below to find out more
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[Music]
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if you are a scottish taxpayer there are
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five levels of income tax
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rates and the changes for the 21 22 tax
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year are two very marginal
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scottish taxpayers pay the same tax as
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the rest of the uk on dividends and
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savings interest
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and as things currently stand at the
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date of this video
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scottish income tax rates and thresholds
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are subject to parliamentary approval
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[Music]
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this is quite an important section as
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you as a uk tax resident person
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has available to them some personal tax
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free allowances
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certain non-uk residents can also claim
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these uk personal allowances too
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refer to page four of our handout and
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let's take a closer look at the full
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suite of personal allowances
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in the uk the standard individual
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personal allowance has increased
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to 12 570 pound per annum in the 21
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to 22 year up 70 pounds from the last
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tax year
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so this means that you can earn up to 12
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570 pounds
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completely tax free but do note there is
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an
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income limit of 100 000 pounds per annum
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for this personal allowance
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if your taxable earnings start exceeding
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this level the personal allowance is
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gradually reduced
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and once your earnings exceed
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approximately 125 000 pounds
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your personal allowance disappears
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altogether perhaps to some of you a
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feeble attempt but still a considerable
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little touch that is often overlooked
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is the ability to transfer 10 of your
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personal allowance to your spouse or
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civil partner
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so in 2122 you can transfer 1 260 pounds
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of any unused personal allowance to your
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spouse or civil partner
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and if they are a basic tax rate payer
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that's a 252 pound saving per annum
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and 504 pounds for a higher rate 40
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taxpayer
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if you rent a room in your residential
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dwelling you can earn up to 7
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500 pounds per annum tax-free this is an
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allowance available to all uk tax
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residents
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that is over and above the standard
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individual personal allowance
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if you are registered a blind person you
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get an additional 2 520 pounds of tax
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free allowance
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over and above the standard individual
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personal allowance
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and if you don't use this allowance you
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can actually transfer it to your spouse
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or civil partner
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regardless of whether they are britishly
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blind or not
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the married couple's allowance acts as
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what is known as a tax
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reducer so if you are married and born
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before the stated
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date on the handout you are eligible for
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this
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and finally there's the personal savings
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allowance this simply allows you as an
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individual to earn
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gross interest on savings up to the
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stated amount tax-free
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depending on which category of taxpayer
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you eventually will fall into into the
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21-22 tax year
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a common question we always get asked is
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why
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why do you have to pay national
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insurance some commentators describe
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national insurance as a
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stealth tax in other words income tax in
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disguise
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however this definition is perhaps a
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little harsh as there are some benefits
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to you of paying a certain level of
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salary and making national insurance
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contributions
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you see unlike taxes national insurance
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contributions are paid into a national
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insurance fund and this fund is used to
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provide social security
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and benefits our handout on page seven
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shows the key benefits and what type of
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national insurance applies
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if you have not already done so pause
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and download it instantly by following
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the link in the description box below
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we'll start with a p-a-y-e employee or a
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limited company director who is taking a
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p-a-y-e director salary
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and who are subject to class one primary
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national insurance
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as shown on page six of our handout the
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lel
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known as a lower earnings limit is the
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amount of earnings you will need to earn
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in the 2122 tax share
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to qualify for a basic state pension
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credit if you recall on page seven of
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our handout a qualifying credit
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goes towards your final basic state
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pension which you will receive
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when you reach the state's retirement
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age in 2021
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22 the amount is 120 pounds per week or
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6
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240 pounds per annum please note there
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is no
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actual national insurance payable on
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earnings up to this amount you simply
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receive a national insurance credit and
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furthermore is very important you
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administer your salary through a payee
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system so make sure your credit is
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properly registered with hmrc
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and the department of wealth and
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pensions simply paying yourself through
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a bank transaction without making the
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necessary submissions to hmrc
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will not cut the mustard next is the
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primary threshold it has increased to
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184 pounds per
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week in 2122 up a grand one pound per
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week
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so if your earnings are up to the annual
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equivalent of 9568 pounds
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for this tax year then you still do not
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pay any national insurance contributions
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personally
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as an employee or director amounts above
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this and up to the upper earnings limit
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national insurance will be payable at 12
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percent the upper earnings limit has
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increased by five pounds per week to
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967 pound per week or 50
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284 pounds per annum and finally any
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earnings above the upper earnings limit
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of 50
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284 pounds per annum will be liable to
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national insurance at
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two percent and a point to know
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directors class one national insurance
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contributions are calculated on what's
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known as an
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annual basis which is different from an
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employee
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the next section relates to you
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employers and limited company business
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owners
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class one secondary national insurance
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applies to your limited company business
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and is paid by your company on behalf of
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a payee
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employee or director it does not apply
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to self-employed sole traders or
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partnerships
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that section is coming next so starting
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from the secondary threshold of 170
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pounds per week or 8
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840 pounds per annum if you pay yourself
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as a director
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or any of your employees above this
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amount then your company is liable to
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pay 13.8
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national insurance on any earnings above
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this threshold
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your company could be eligible for the
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national insurance employment allowance
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which has been frozen at 4 000 pounds
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per annum
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in the 21 22 tax share as shown in page
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six of our handout
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so for example if your company class one
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secondary national insurance liability
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for the 21 22 tax year adds up to four
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thousand pounds or any amount below this
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then your company can use the employment
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loans to offset this liability
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and actually pay no national insurance
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up to this limit
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however the national insurance
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employment allowance is not
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applicable to the following if you're a
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single director limited company with no
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other employees
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off payroll workers these are employees
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who are deemed inside ir35
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and if your limited company had a class
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one secondary national insurance bill
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in excess of a hundred thousand pounds
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in the 2021 tax year
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regardless of anything else your company
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will not qualify for the employment
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allowance in the 21 22 tax year
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however most small limited companies
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will not be affected by this particular
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exclusion
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if you are a married woman who has opted
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into the reduce
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rate scheme well then you pay a reduce
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rate of only 5.85
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between the primary and upper threshold
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however there are disadvantages to this
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scheme too
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and finally national insurance rates for
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the self-employed often sold traders and
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partnership
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businesses if your self-employed
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business generates profits in the 21
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22 tax share then you are subject to
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paying at class 2
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and class 4 national insurance for class
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2 your profits must exceed 6515 pounds
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per annum
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up by 40 pounds from the last tax share
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and if they do you pay a flat three
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pounds and five pence per week or 158
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pounds 60 per year
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for class 4 national insurance your
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profits in the range between nine
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thousand five hundred sixty eight per
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annum
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two fifty thousand two hundred and
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seventy pounds per annum you will pay
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nine percent
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national insurance any profits above
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fifty thousand two hundred and seventy
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pounds per annum is subject to class
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four national insurance at
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two percent there is a class three
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voluntary category that you can pay well
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voluntarily this is useful if you are
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low on contributions or want to top up
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your basic and new state pension
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qualifying credits
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moving on to dividend tax rates and
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thresholds on page five
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of our handout so as a bit of a
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background dividends themselves are only
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payable by limited companies
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from after corporation tax profits or
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existing distributable reserves
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to shareholders so if you are a
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shareholder who receives a dividend
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these are subject to dividend tax to be
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paid by you personally
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dividends are paid out in proportion to
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your shareholding so for example if you
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own 50
[686]
of the shares in your limited company
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and your partner owns the other 50
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you will each receive 50 of the profits
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or distributable reserves
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the directors of your company decide
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what amount of dividends are to be paid
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and quite often you are probably a
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director and shareholder of your
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own company now for the taxes first of
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all there is a dividend allowance of two
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thousand pounds in the 2122 tax year the
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same as the last tax year
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so each shareholder can receive up to
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this amount in dividends completely
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tax-free
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dividend tax rates are chargeable in
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line with income tax thresholds
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so as you can see from the handout on
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page five any dividends between
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twelve thousand five hundred and seventy
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one pounds and fifty thousand two
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hundred seventy pounds are subject to
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the ordinary rate of
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seven and a half percent any dividends
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between 50
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271 pounds and 150 000 pounds will be
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subject to dividend tax at 32.5
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the higher rate and finally any
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dividends over and above 150 000 pounds
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are taxed at the additional rate
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of 38.1
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[Music]
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so this section is specifically for you
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if you are a limited company director
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shareholder
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and are looking to optimize your salary
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and dividends for the 21
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22 tax year essentially you have a
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choice of what level of tax
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optimized director's salary to pay
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yourself as follows
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number one is up to the class one
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primary threshold of 9568 pounds per
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annum
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or number two up to the personal
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allowance threshold of 12
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570 pounds per annum now for either of
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these options you'll pay
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no income tax and please remember as a
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company director you can set your own
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director salary at any amount so long as
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your company has the funds to pay it
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and if there are any other directors or
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shareholders they are an agreement
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with the first option you will pay no
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class 1 primary national
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insurance and if you are a single
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director with no payee
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employees in your business then it is
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perhaps the recommended option
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for you assuming tax optimization is
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your objective
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there are non-tax reasons as to why you
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would pay yourself a much higher salary
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your company will end up paying a very
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small amount of class one
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secondary national insurance of about a
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hundred pounds for the tax year
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but that's more than offset by a
[819]
corporation tax saving of about 145
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pounds
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your company will receive at this level
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of direct salary
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the other advantage with this option is
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that you can then take a further three
[830]
thousand and two pounds per annum
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as a dividend tax free because the nine
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thousand five hundred sixty eight pounds
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plus the three thousand and two
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takes you up to your personal allowance
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of twelve thousand five hundred seventy
[840]
pounds
[840]
so if you don't use it you will lose it
[843]
if you are a limited company business
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with more than one director or a single
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director with a paid employee on paye
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then as a director you will want to
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consider option 2 a salary up to the 12
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570 personal allowance threshold
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why because your company will more than
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likely qualify for the national
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insurance employment allowance of 4 000
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pounds
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and therefore pay no class 1 secondary
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national insurance
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up to this it to mount so let's assume
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you take up option one the class one
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primary threshold salary of nine
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thousand five hundred and sixty eight
[876]
pounds per annum
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you take the additional three thousand
[878]
and two pounds of dividends and then
[880]
another two thousand as a tax-free
[881]
dividend allowance
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your total aggregate tax-free personal
[884]
income so far
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is fourteen thousand five hundred and
[887]
seventy pounds
[889]
and finally a further thirty five
[890]
thousand seven hundred pounds can be
[892]
paid in dividends per
[893]
shareholder at the ordinary rate of
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seven and a half percent
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this provides a total personal income of
[899]
fifty thousand two hundred seventy
[900]
pounds for the twenty twenty one twenty
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two tax year
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and you will only pay two thousand six
[905]
hundred and seventy eight pounds
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in dividend tax now please let us be
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clear here that this is a generic but
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yet a very applicable
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example based on certain assumptions the
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main assumption
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is that you have no other sources of
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income from anywhere else in the 2122
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tax year
[920]
amongst others unfortunately our video
[923]
cannot cover
[924]
every specific circumstance or scenario
[926]
so if you are expecting other sources of
[929]
income or the dynamics of your income
[930]
and assets are more complex
[932]
and if you are looking for specific
[934]
advice for your particular scenario
[936]
why not try our bite size advisory
[938]
service by following the link in the
[939]
description box below
[942]
i hope this video has helped you
[944]
understand some of the changes in the uk
[945]
budget 2021 and the new tax rates and
[948]
thresholds in a bit more detail
[950]
and taking you one step closer to
[951]
knowing your numbers as always
[953]
let us know in the comments your
[954]
thoughts on today's video or if there
[956]
are any topics you'd like us to cover
[958]
in the future finally be sure to like
[960]
and subscribe as this really does help
[962]
us to get our content
[963]
out there this is tony d'angel for the
[965]
accounting and tax academy
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thanks for tuning in
[967]
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[Music]
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[Music]
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you
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