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