The new tax year is fast approaching and for owner-manager businesses, this is the perfect time to consider the most tax-efficient remuneration structure for 2021/22.
A few small changes were announced in the March 2021/22 budget as summarised below:
- Increase in the employer’s national insurance threshold to £8,840 (2020/21: £8,788)
- Increase in the employee’s national insurance threshold to £9,568 (2020/21: £9,500)
- Increase in the personal allowance to £12,570 (2020/21: £12,500)
- Increase in the basic rate band to £50,270 (2020/12: £50,000)
- The tax-free dividend allowance remains at £2,000
Therefore an annual salary package (including bonuses) of £9,568 will ensure that the director pays no employees NI and the saving in Corporation Tax will mean it is more efficient to pay a little bit of the employer’s national insurance.
Therefore, assuming the director has no other income outside of their business, the most optimum remuneration structures can be broken down into two options.
1. No Employment Allowance available
Where the employment allowance of £4,000 is either not available or will be fully used in the year for non-directors salaries, then a salary up to the national insurance primary threshold of £9,568 would be best. This equates to £797.33 per month.
In addition to salary, the recommendation would be to top the director’s salary up with dividends of £40,702 taking them up to the top of the basic rate tax band of £50,270 This would ensure that all income from the company is taxed at the lowest rate of tax.
With this combination of salary and dividends, the net tax (company and employee) payable for the year would be £960.04 as calculated below:
|Tax & NI||(£2.777.96)||(£231.50)|
|Net income after tax||£47,492.04||£3,957.67|
|Corporation tax (CT) saving||£1,817.92||£151.59|
|Total Income (after CT)||£49,309.96||£4,109.16|
2. Employment Allowance available
If the directors can claim the £4,000 employment allowance against their salaries in the year, taking the salary to £12,570 will be more beneficial. Although this means that the directors will pay some national insurance (at 12%) they will be able to relieve the additional salary at a rate of 19% for Corporation Tax.
A salary of £12,570 and dividends of £37,700 would be the most tax-efficient remuneration package in this scenario.
With this combination of salary and dividends the net tax payable for the year would be £649.44 as calculated below:
|Tax & NI||(£3.037.74)||(£253.15)|
|Net income after tax||£47,232.26||£3,936.02|
|Corporation tax (CT) saving||£2,388.30||£199.02|
|Total income after CT||£49,620.56||£4,135.05|
There are some key considerations that will affect the advice given, this will mean that discussing a bespoke remuneration structure would benefit you. These circumstances include (but are not limited to):
- You fall between options 1 & 2
- You have other income declared through your self-assessment tax return
- You have a requirement to take remuneration in excess of the basic rate band
- Your company has net liabilities and cannot afford to declare dividends
Contact us to discuss the most beneficial structure for your specific circumstances.