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How to pay yourself tax efficiently from your Ltd Company 2020-21 - Salary & Dividends - YouTube
Channel: Accounting and Tax Academy by Tony D
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Hi there this is Tony D of i-tech finance
and Aidhan accountancy. I really
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trust you are well. This video
is all about your tax efficient
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remuneration in the 2020-21
tax year - this is your tax efficient
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remuneration coming from your uk-based
limited company and it's a combination
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of salary and dividends. The 2020-2021 tax
share spans from the 6th of April 2020
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all the way through to the 5th of April
2021. In order to make this video
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very useful it's practical and
it's going to go into details
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as to what kind of strategies you could actually adopt in terms your tax efficient
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remuneration, what level of salary is
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available to you tax efficiently
considering the national insurance
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thresholds as well and also what are the
different levels and thresholds of
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dividends. I'm going to jump onto the
laptop and do a screen share
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with you. We're going to go through some
numbers and make this as
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practical as possible in order to help
you so you can know your numbers well in
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advance of the next tax year and even
early in the tax year so you can make
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informed decisions for your business and
finances - off we go let's jump on
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the laptop. Here we are guys we're
onto the laptop and here's the title of
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tax efficient salary in dividends from a
UK limited company in the UK tax year 20
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to 21 so we're just going to run through
a few basics to begin with just as a
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refresher for perhaps most of you for
some of you this may be quite new
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material and you're a limited company
and you the director shareholder are
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separate legal entities here in the UK
ok so do remember that even though as a
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director shareholder you are the manager
and owner of that legal entity you asked
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in the eyes of the law quite separate
and in the corner to the Companies Act
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2006 your limited company's money is not
your money well at least not while it's
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in the limited company bank account ok
it belongs to the legal entity which is
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your limit limited company
it only becomes your money or the money
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within the company becomes your money is
when you pay yourself Ayub remuneration
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and that's what this video is all about
now a couple of assumptions here I'm
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gonna assume throughout this video that
you have no other sources of income okay
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it's just for simplicity and not to
overcomplicate this video my goal is to
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keep it as simplistic as possible
although accounting in nature is not
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particularly simple and it's not that
straightforward and I can understand if
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it's not gonna be that easy to follow
but certainly you know keeping that
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assumption will keep it simpler than it
could be and your company does not and I
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repeat does not qualify for the ni C
employment allowance of 4,000 pounds in
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the 20 to 21 year okay although I am
gonna address that and sort of talk
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through well what happens if it does
qualify for the employment allowance the
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personal UK tax year for 2021 spans from
the 6th of April 2020 to the 5th of
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April 21 okay
and just so you're very clear the UK
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personal tax year is not the same as
your limited company yeah I can't repeat
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is not the same so your limited company
the company a could be from the 1st of
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April to the end of March for example
that is the most closely aligned company
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year to the UK fiscal tax year okay but
in many cases your company could be the
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end of February it could have a company
end of April May any whole month
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basically so they're not that they're
not one of the same things a director
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salary can be taken from free company
tax profit that's pre corporation tax
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profits okay so it's a bit like booking
an expense or shall we say expenses
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through your company okay it's all
pre-tax and therefore effectively it
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gets a 19 percent discount in this case
your salary works in the same way so it
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is one of the most tax efficient ways of
remunerated yourself from your company
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although the
tax benefits do have a cap dividends are
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only taken from post company tax profits
okay so only if your company is making a
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profit uh or if it's not making a profit
it has historical reserves okay so in
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simple language that's it's got savings
that have already been taxed before in
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previous years and if that's sitting in
your account in great you can take
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dividends okay but you have to have
sufficient funds to in order to pay that
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and it has to be from post corporation
tax profits and dividends do not attract
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income tax or national insurance at all
they are subject to a dividend tax so an
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optimal director salary is what we're
trying to achieve here not just a
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minimal director sorry okay there is a
difference between the two a minimal
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directors salary is the lowest amount
that you can possibly pay self well
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technically the most amount you can buy
yourself is probably a pound okay in
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terms of a minimum sorry directors
salary so what we're talking about here
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is what's optimal in the view of tax
efficiency okay this is where the focus
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is so an optimal director salary can
either be at the personal allowance
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threshold which in the 2021 year is now
twelve and a half thousand pounds per
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annum all and the second bullet point at
the primary class-1 national insurance
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ni threshold which is nine thousand five
hundred and sixteen pounds to be precise
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for annum in 2021
now there's two options that I have
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presented you with here now some of the
more technical ones of you out there
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will actually argue will hang about
there's a third option and that is at
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the secondary class one national
insurance threshold which is lower than
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the primary class one national insurance
her threshold and you can actually see
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in the third bullet point that the
number or that secondary threshold is
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actually eight thousand seven hundred
and eighty eight pounds
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I can highlight it here eight thousand
seven hundred eighty eight pounds for it
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so slightly lower than the primary ni
threshold um however I'm only going to
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focus on the top two because there's a
good reason why I'm actually advocating
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as a minimum the primary level and
that's the interconnection with state
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benefits okay and there's a reason why
there's a primary and secondary
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threshold so yes once you may pay
marginally small amount of national
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insurance on the primary class one the
benefits more than outweigh that and I
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will demonstrate that shortly now the
third point is not only just to tell you
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ii agree on a threshold which is eight
seven eight eight but also there's a
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dependency on whether you're the only
direct employee you paid above the
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secondary ni threshold so this comes
back to the employers and IC allowance
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of four thousand pounds so the
assumption here the calculations i'm
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gonna go through assumes that you don't
qualify for this but again I will make
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mention and give you a little bit of
clarity as to what happens if you did so
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here's the first strategy okay and that
is a strategy and in these two
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strategies I'm gonna present to you is
what I'm assuming here is that your
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aggregate earnings are gonna be around
about fifty thousand pounds okay and I'm
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pitching at that level as so you know
it's reasonable it's quite median and
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for a lot of limited company directors
some of you may be lower than that or
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you may be higher than that but
generally speaking you know it's just to
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give you an illustration of the
principle and also a good flavor of the
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numbers so in this strategy you can take
the directors salary at the personal
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allowance threshold which you can see
here is clearly twelve and a half
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thousand pounds per annum then there's
also a tax-free dividend okay so you can
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take two thousand pounds at the zero
percent nil right okay so there's no tax
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on that dividend at what so so it gives
you a soft total so far fourteen and a
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half thousand pounds okay and then a
dividend are further dividend over and
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above that will actually attract an
ordinary rate of dividend tax a
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seven-mile percent okay and the cap on
that is thirty five and a half thousand
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over and above this amount so in other
words when you put all them together
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you got an aggregator Ling's gross
earnings guys here okay this is gross of
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50,000 pounds
okay social total gross earnings all
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right so what does a tax look like on
that well again let's break it down on
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the directors salary there is zero tax
and nothing at all remember that's your
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personal allowance you can earn that
much tax-free income tax free
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you've got the tax-free dividend there's
no personal tax on that either and then
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there's the dividend of the ordinary
rate dividend which is thirty five and a
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half thousand pounds and then if you
take seven and a half percent of that
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that gives you an amount of around about
two thousand six hundred and sixty two
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pounds okay so it's in this figure
already but what happens here is because
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your salaries at the personal allowance
level it exceeds the national insurance
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threshold so therefore there's gonna be
some class one primary I employees
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national insurance that's what you as a
director employee pay okay and then
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there's going to be some class one
secondary employers national insurance
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and that's what your company pays so
what I've done is added the tax here
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I've added these all together and it
comes out to a man or three thousand
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five hundred and thirty five pounds okay
now again amongst the technicians if you
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are a quite a technical person and you
know you you follow accounting or you
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have quite a good aptitude in accounting
what you will probably know is that
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class one secretary employees is
actually paid by the company not the
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individual and you're absolutely right
but just for illustrative purposes here
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what I want to demonstrate to you is
what happens or what is the effective
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rare tax that is actually generated by
the level of directors salary that you
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take a case I can compare and contrast
two scenarios nonetheless if you are
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director fewer owner manager owner
director of your company and the fact
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that your company pays that you pay the
fact is you know economically it's still
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yeah one of the you know in a in a
roundabout way one of the same and
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you're still bearing that tax so anyway
and it comes out to be three five three
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five and that's a fact
rate of 7.1% to 35 35 into 50,000 at
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seven point one percent and seven point
one pence in the pound of tax now let's
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look at the second scenario strategy
number two is to pay your director
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salary at ninety five one six so that's
at the primary ni threshold okay nine
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five one six plus four nine eighty four
now where did that four nine eight four
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come from okay so it doesn't matter what
level of director salary you pay
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yourself okay if we go back to the
previous slide you will still get this
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tax-free dividend you can still do that
okay so part of that for nine eighty
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four includes the two thousand pounds
tax-free dividend the rest is the
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difference between the personal
allowance level 12 and a half thousand
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and your direct salary okay so don't
forget you're taking a director salary
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up to nine five one six but your
personal allowance is twelve and a half
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thousand so there is still a difference
there okay and that difference you can
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then take as a dividend and again it
won't attract any tax so adding that in
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gives you again this is your personal
remuneration gives you fourteen and a
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half thousand okay again if I flip back
it's the same subtotal as the last or
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the strategy one and again you can take
your standard level of dividend up to
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thirty five and a half thousand to take
you to the next threshold which is fifty
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thousand pounds and again let's do the
math seven our percent will rewrite on
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thirty five and a half thousand here
that gives you an amount of tax plus in
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this situation you'll end up paying no
class one employees okay because you're
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at the threshold it's only just started
and therefore there is no mathematically
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there is no last one employees to pay
and there will be a really small amount
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calculated about 101 pounds of employers
ni because don't forget there's a
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difference between secondary and primary
ni and primary exceeds second roots are
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therefore there's a small amount of
national insurance to be paid so the
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total tax liability in this same
situation which is seven tops in a
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thirty five and a half plus the one I
want is two seven six four so you can
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see here an effective rate at five and a
half percent you can see again if I just
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flick back there's quite a difference
okay in the amount of the total
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tax liability for these different
components where you make just one
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decision and that is the level of your
director salary okay nine five one six
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compared to twelve and a half thousand
okay now again if you are technically
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quite up to speed of accounting except
for one thing you will notice is it
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ignores corporation tax and again you
are absolutely right because there is a
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corporation tax benefit of actually
taking more director salary as opposed
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to a dividend okay so that hasn't been
factored in I do appreciate that and I
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do accept that but what again I wanted
to just try and make this as simple as
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possible to compare and contrast the two
okay so in real terms even though it's
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three five three five what you will find
is in there okay there needs to be a
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corporation tax saving element because
the directors salary is actually higher
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don't forget director salaries are paid
before corporation tax and dividend
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after corporation tax okay now so in
this scenario here what it is you've got
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a great earnings of 50,000 now if your
company can pay you more all well and
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good and if that does happen you can
take up to one hundred thousand pounds
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to take you to the next threshold which
is one hundred and fifty thousand pounds
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okay
and that hundred thousand is taxed at a
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marginal rate of thirty two and a half
percent so every pound you take open
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above that fifty thousand thirty two and
a half cent is dividend tax up to a
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maximum of 100 and then once you reach
one hundred and fifty thousand pounds
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you then hit what's called the
additional rate and anything every one
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hundred and fifty thousand aggregate in
terms of dividends attracts at thirty
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eight point one percent or thirty eight
point one pence in the pound dividend
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tax okay and very last I just want to
finish off on two things the reason also
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the personal allowance withdrawal and
there's the child benefit withdrawal at
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certain thresholds okay so this video
isn't it going
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to those into any great depth there are
separate videos that I've done for those
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that you just need to bear them in mind
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so I really really hope you have found
this video useful practical and you can
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go away and use its contents and apply
it to your own business your own salary
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and dividend remuneration strategy for
the 2021 upcoming year now if you like
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this video please like subscribe put in
a comment there I certainly go through
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quite a lot of the comments read them
and respond to them where I possibly can
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and also you know let me know if there
are any further videos that you would
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like out there any other content that
you'd find useful that I can sort of
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Diaries to do once again thank you very
very much for watching and until the
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next video keep well and all the best
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you
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