[Music] Thank you for watching this video
I am Tony Dhanjal of Aidhan and i-tech. What this video is all about is an
optimum director salary for the 2020-21 tax year. We're
into this new tax year which spans from the 6th of April 2020 all the way
to the 5th of April 2021 and if you're already limited company director
whether you're a trading business, a contractor or freelancer company then this
video is definitely for you. Because what I'm going to look at and what I'm going
help you establish is what level(s) of director optimum
salary are available for you, how they interact with national insurance
thresholds, the different kind of levels of national insurance and the different
types of pension contributions and state benefits so you know how does that
all interact when you make your decision - so what I'm going to do is I'm
going to jump onto the laptop and take you through a few examples give you the
numbers as so you as a director of your company can make an informed decision on your
directors salary for yourself and fellow directors this tax year. Okay so here we
are at the laptop and you can see the first presentation slide labelled director
salary 2020-2021. So just a few basic points to start with a director salary
is paid to a director of a limited company from pre-corporation tax cash
flow. So that means basically before any corporation tax is calculated and
deducted from your company a director salary is paid. So in other words it goes
through the expenses line and it comes out completely pre-tax. It can be paid
weekly monthly or annually despite whatever you hear however the most
common practice is to pay it monthly simply being that's how the PAYE (Paye As You Earn) system is
set up and run in the main but it's not to say it can't
be paid weekly or annually and it must be administered through PAYE pay as you
earn payroll system to include what's called RTI real-time returns. So guys in
the 2020-21 tax year now that's the tax year that spans from
6th of April 20 to the 5th of April 21 there are two key scenarios that you've
got to bear in mind when it comes to a directors salary. The first one
here as you can see on the screen is the scenario A - your company does not qualify
for the NIC employment allowance This employment allowance is
worth up to £4,000 per year When I mean four thousand pounds a
year I mean in terms of secondary class 1 national insurance liability. If the bill is up
to any any amount up to four thousand pounds then basically if your company
did qualify for the allowance it would be exempt and I'm going to show example
a little later on. Typical scenarios where your company does not qualify for
the NIC employment allowance is if you're the sole director of your limited
company, if you're a one-person band. If your business is doing
more than 50% of work in the public sector in terms of commercial revenue
that's been generated and if your revenue earnings are within
IR35 so this is particularly applicable to contracts and freelancers out there
although in this current tax year that has been deferred and the new IR35
payroll rules have been deferred until next year so they'll be less contractors
falling within IR35 but it could still happen. Scenario B is that your company does
qualify for the NIC employment allowance as you can see here so and
this is a typical scenario where there is more than one director shareholder
of the limited company who are paid above the secondary NI threshold. So
in other words you're paid more than £732 per month. £732 the output is
rounded there is decimal points that but that the key is to get the principle
across and if you are a multi director or an employee company then the chances
are your company will qualify for this NIC employment allowance so really
important to sort of distinguish between the two. So the first scenario I've
termed this scenario A I want to take you through is setting your
directors salary at the primary class 1 NI threshold. That's a bit of a
mouthful you don't have to memorize out or anything like that but just to put it
simply the amount is £792 per month that equates around about £9,500
per annum. For you
arithmetic people out there there is a bit of rounding going on here so the
key here really is to get the principle across first and foremost but
the monthly published amounts is £792 you can check that on gov.UK and with this
level of director salary it's probably applicable in fact it's most likely more
applicable to those of you who are one person limited company directors and by
being that you won't qualify for the employment secondary and NIC allowance
On this level of director salary there is a very very small amount of
what's called class one secondary NIC or national insurance as you can see below
there'll be absolutely no income tax and the class one secondary is around about
a £100 per annum rounded it's about £99 to £100 so it's a very very
small amount and invariably that £100 is payable towards the end of the
tax year normally in the last three months to the last month of the payroll
year. Scenario B which is the personal allowance threshold level
so in this particular scenario it's probably ideal that you pay yourself
this amount of salary which is £12,500 and that's a new UK
personal allowance if your company does qualify for the
employers NIC allowance. Even if it doesn't I've done some calculations to
show you how much the tax and national insurance would be so if you pay yourself
£12,500 per annum of Directors salary that's £1,042 per month the first
scenario here in this particular example is I know Scenario B but now
let's call it Scenario B (i) and that is the income tax will be zero and the national
insurance assuming that your company does not qualify for the employers NIC
allowance will be £872. So there'd be a
little bit of class one employees nic all right which is payable by the
employee to HMRC but it's physically done by the company but it's on behalf
the employee and then you've got the class one employers in I see here £512
which is paid by the limited company. And I've got some
calculations down here I've done the calculations as to how I got to 360 and 512
it's down here so you can study that and there is a bit of rounding
going on so you know the key here is not to sort of you know it's not all about
the arithmetic it's it's also about getting the principal across so in that
scenario that's what the tax bill would be now if your company did qualify for
the employers and NIC allowance then what would happen effectively is £512
that would not become payable okay the £360 would be that still would be payable
but the £512 would not be. That's what's going to happen because you
can you can have class 1 employees NIC bill up to £4,000 as long as
you meet the qualifying criteria and then up to £4,000 is not payable
and I've done a little example here in this box to show you how it works if
this is an income state for ABC limited in the expenses line of the income
statement you've got a director salary that will go through two and a half
thousand pounds then on top of that you got the employers NIC this one here £512
and if you don't qualify for the the employer NIC employees allowance
then basically that is total expense if you do qualify
then what would happen is you'll see another line here employment allowance
which almost just it basically just negates the employers NIC which does
not become payable. So there we have it guys I really really hope you found this
video useful informative and I really hope it will help you make an informed
decision in terms of an optimal director salary for this tax year so if you like
the video please like comment and subscribe I'm certainly going to be doing more and
more videos and as I put on the screen my mission here is to help you know your
numbers so you can make informed decisions and I'm a great believer that
if you take care of your numbers your numbers will take care of you and your
family until the next video all the best and
once again thank you very much for watching :-)