Choosing the Optimum Salary for 2021-22 Reply

Its a new tax year, small business owners will be deciding how extract their income, lets look at the choices.

Business Expenses

If you personally incur costs for you business, make sure you reclaim them, for example

Business Mileage (keep records of your trips)

Working from Home Costs

Business Travel Costs

If you incur any cost wholly and exclusively for your business you can reclaim it and it tax free to you and tax deductible to the company.

Pensions

Pensions are extremely tax efficient, contributions are normally tax deductible for the company (they can by up to £40k per year), the money grows in the pension tax free and when you reach 55 your can tax up to 25% out tax free.

Electric Company Cars

There are a range of incentives including the Government Plug In Allowance of up to £2,500, very low rates of Benefit in Kind and 100% First Year Capital Allowances.

Interest on Loans

If you have lent money to your company and you borrowed that money and pay interest on it you can claim the interest on your self assessment return for qualifying interest relief.

You company can also pay you interest on the loan but it will need to deduct interest at source at 20% under the CT61 rules.

You can reclaim tax paid on your interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year. Further details at Tax on savings interest – GOV.UK (www.gov.uk)

Salary Options

The tax free allowance is £12,570 (£1,047.50 per month) but National Insurance is the main driver for salary levels

Class 1 National Insurance thresholds2021 to 2022
Lower earnings limit£120 per week
£520 per month
£6,240 per year
Primary threshold£184 per week
£797 per month
£9,568 per year
Secondary threshold£170 per week
£737 per month
£8,840 per year

Most business owning directors who can take dividends will choose either £737 per month or £797 per month, the £797 qualifies you for state pension, you can check your qualifying years with HMRC

There are special rules for applying National Insurance to Directors

Furlough

If you are on Furlough (CJRS) you should leave you pay at it previous level and then review it when you return to work.

National Minimum Wage

The national minimum wage does not apply to company directors unless they have contracts that make them workers as defined in section 54(3) of the act.

Dividends and the Dividend Allowance

Dividends are a great choice provided you company has made a profit or has profit reserves (if doesn’t its illegal to pay dividends)

Tax yearDividend allowance
6 April 2021 to 5 April 2022£2,000
6 April 2020 to 5 April 2021£2,000
Tax bandTax rate on dividends over the allowance
Basic rate7.5%
Higher rate32.5%
Additional rate38.1%

steve@bicknells.net

What is the optimum pay for business owners in 2018/19? Reply

Directors aren’t subject to Minimum Wage rules and if they are the only paid employee then they don’t need an auto enrolment pension.

So assuming they don’t get a salary from another job, it generally makes sense for Directors to be paid above the NI Lower Earnings Limit and below the Employee’s primary class 1 contributions level.

The LEL for 2018/19 is £116 per week and the Primary Threshold is £162 per week.

So that’s £6,032 to £8,424 per year.

Earning above the LEL means directors will qualify for certain state benefits.

If the company has other employees and they earn sufficient to incur national insurance then you could pay more to the director and take advantage of the Employment Allowance of £3,000 which offsets employers national insurance.

The personal allowance will be £11,850 for 2018/19, that’s how much you can earn tax free.

Higher rate tax starts when total earning hit £46,350.

The Dividend Allowance drops from £5,000 to £2,000 in 2018/19

steve@bicknells.net

 

What is the optimum pay for business owners in 2017/18? 1

Most small business owners will either choose £8,164 as a salary (free of tax an NI) or £11,500 (tax free)

If you are not eligible for the Employment Allowance, then £8,164 will probably be the best option, it will reduce your corporation tax bill by 19% x £8,164 = £1,551

If you can claim the employment allowance then £11,500 will probably be best because that will save 19% x £11,500 = £2,185

Less Employee NI to pay at 12% x (£11,500 – £8,164) = £400

Net Saving £1,785

Beyond this you will pay income tax at 20%.

So in summary, I think the optimum salary is £11,500 or £8,164

Above this you should take dividends. The Dividend Allowance for 2017/18 is £5,000.

This is a simplification and you should speak to your accountant about your specific tax affairs.

steve@bicknells.net

What is the optimum salary for 2016/17? 1

small business displayed on calculator

There have been several tax changes in the Budget:

  1. Changes to Personal Allowances –
    The Personal Allowance is the amount of income you can earn before you start paying Income Tax. This is currently £10,600 – it will already rise to £11,000 in 2016, and will now increase further to £11,500 in April 2017.

    The point at which you pay the higher rate of Income Tax will increase from £42,385 to £43,000 in 2016 and to £45,000 in April 2017.

  2. Employment Allowance – The employment allowance is £3,000 but there is a restriction on it being used by single person companies.
  3. Dividend Tax -From April 2016 you’ll pay tax on any dividends you receive over £5,000 at the following rates:
    • 7.5% on dividend income within the basic rate band
    • 32.5% on dividend income within the higher rate band
    • 38.1% on dividend income within the additional rate band

    This simpler system will mean that only those with significant dividend income will pay more tax.

    The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.

    Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.

These changes also make it more complicated in deciding whether to incorporate, so I have added a new calculator to help you decide https://stevejbicknell.com/tax-calculators/

The £5,000 dividend allowance is a bit confusing because its an allowance and not an exemption, so it becomes part of your overall income.

Basically, most small business owners will either choose £8,060 as a salary (free of tax an NI) or £11,000 (tax free)

Because your salary is tax deductible in companies the difference £11,000 – £8,060 = £2,940 plus 13.8% NI = £3,345.72 which saves 20% corporation tax = £669.14

There will be NI to pay 12% employee and 13.8% employer = 25.8% x £2,940 = £758.52 – £669.14 = £89.38 net tax

Beyond this you will pay income tax at 20%.

So in summary, I think the optimum salary is £11,000.

Above this you should take dividends.

This is a simplification and you should speak to your accountant about your specific tax affairs.

Steve@bicknells.net