What is the optimum directors’ salary and dividend mix for 2020/21?
Small companies will usually pay their directors with a mix of salary and dividends. The level of the directors’ salary is usually set in order to avoid any income tax and national insurance. On this basis the recommended remuneration package for the forthcoming tax year is:
|Upper limits (if intention is to fully utilise the basic rate tax band)||
|Directors’ salary – per annum||
|Dividends – per annum||
It should be noted that dividends exceeding both the personal allowance and the dividend allowance of £2,000 will be taxed via the directors’ personal income tax return at 7.5%. Meaning that if dividends are paid all the way up to the basic rate band of £50,000 (same as last year) there will be a personal tax bill of £2,663 (last year £2,663)
Companies with more than just a single director on the payroll may benefit from the Employment Allowance which reduces the company’s Class 1 National Insurance contributions (Employer’s N.I.) by up to £4,000.
In such cases there may be an opportunity for directors to eke out a little more tax savings by paying themselves a salary of £12,500 and dividends up to a maximum of £37,500 (the overall tax saving between the director and the company being around £260).
This second option will not be the best fit for everyone. More than ever, personal circumstances must be carefully considered to give the best results.
Each client of ours will be receiving a personalised recommendation shortly.
Enjoy saving tax?