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As a company director what salary should I pay myself in 2021/22

The new tax year means we need to consider the most tax-efficient remuneration structure for 2021/22 if you are taking a mix of salary and dividends from your company.

Some changes were announced in the March 2021 budget, the key ones being:

• An increase in the employer’s national insurance threshold to £8,840 (20/21: £8,788)

• An increase in the employee’s national insurance threshold to £9,568 (20/21: £9,500)

• An increase in the personal allowance to £12,570 (20/21: £12,500)

• An increase in the basic rate band to £50,270 (20/12: £50,000)

• The tax-free dividend allowance remains £2,000

Therefore, an annual salary package of £9,568 will ensure the director pays no employees’ NI and a saving in Corporation Tax means it is more tax efficient to pay a small amount of employer’s NI.

Assuming the director has no other income outside of their business, the optimum remuneration structure can be shown as follows, where there is no Employment Allowance available.

Where the Employment Allowance of £4,000 is either not available or fully used for other staff, a salary up to the NI primary threshold of £9,568 pa will works best, being £797.33 per month.

In addition to a salary paid via PAYE, our recommendation would be to top up the salary with dividends of £40,702 up to the top of the basic rate tax band of £50,270.  This ensures that all income from the company is taxed at the lowest rate of tax.

However, if the director is also claiming Child Benefit this should be reduced to £50,000, as the Child Benefit threshold has not moved in line with the higher rate threshold and Child Benefit is still taxable when your income exceeds £50,000.

With this combination of salary and dividends, net tax (company and employee) for the year would be £960.04 as below:

Income                                          Yearly                       Monthly

Salary                                         £9,568.00                     £797.33

Dividends                                 £40,702.00                 £3,391.83

Total Income                            £50,270.00                  £4,189.17

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

Possible Issues

There are some other considerations that may affect the optimal position meaning a bespoke remuneration structure could be needed. 

These circumstances include, but are not limited to:

  • Claiming Child Benefit – as the level at which the benefit becomes taxable remains £50,000
  • Some or all of the £4,000 annual Employment Allowance is available.
  • You have other income declared through your self-assessment tax return
  • You take remuneration in excess of the basic rate band
  • Your company has net liabilities and cannot afford to declare dividends

If any of the above applies and you would like to discuss setting an optimal remuneration plan for the 2021/22 tax year call us on 01904 404560.

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BUDGET 2021

The Chancellor delivered the Spring Budget on 3rd March 2021 we summarise below what it means for UK businesses.

The announcement is crucial to the UK’s economic recovery from the coronavirus pandemic
 
There were many new measures, as well as changes to existing schemes including Furlough and Universal Credit to support for Green initiatives. 
 
We summarise below the most relevant to small and medium sized businesses. 

1. Corporation Tax Rise

Corporation Tax was probably one of the most discussed points before the Budget. This is set to increase to 25% starting from April 2023. 
 
However, the new rate will only apply to businesses generating profits over £250,000. 
 
Companies with profits below £50,000 will pay the current rate of 19%. A taper will be introduced for companies with profits between £50,000 and £250,000. 

2. “Super-Deduction” 

 To boost investment and offset the Corporation Tax increase, the Chancellor announced a “super-deduction” of 130% of the value of capital investment from a company’s taxable income.  

At a Corporation Tax rate of 19% this works out at roughly 25p of tax saved for every pound invested

A first-year allowance of 130% will be available for expenditure on plant and machinery that qualifies for main rate capital allowances of 18%. 

Expenditure on plant and machinery qualifying for special rate capital allowances of 6% will qualify for a 50% first-year allowance.  

This is independent of the Annual Investment Allowance, which can be claimed instead where this is more beneficial 

3. Tax Thresholds Frozen Until 2026 

 The Chancellor stood by his promise not to break the Triple Tax Lock. However, various tax thresholds will remain frozen until 2026.  
 
The income tax personal allowance and higher rate threshold (which will be raised in April 2022 and then unchanged until 2026) as well as Inheritance Tax, Lifetime Allowance, and the annual subscription limit for ISA’s, will be frozen at current levels. 

4. Furlough

The Furlough scheme to help employees and employers will now be extended through to 30 September 2021. 
 
As in 2020, employers will contribute to their furloughed employees’ pay, at 10% of normal pay for unworked hours in July, rising to 20% in August and September. As before employees will need to be consulted and the process documented. 
 
5. Self-Employment Income Support Scheme (SEISS) 

The self-employed will be able to claim two further grants under the SEISS.  

The fourth grant for February to April 2021 will be worth 80% of three months’ average profits, capped at £7,500.  

The final grant will cover May to September and will depend on the impact the pandemic has had on turnover.  People whose turnover has fallen by 30% or more will receive the full 80% grant. Those whose turnover has fallen by less than 30% will receive a 30% grant. 

The final two grants will be available to those who started their self-employment in 2019/20, if they filed their 2019/20 tax return by midnight on 2 March 2021

6. Carry-back period for losses temporarily increased 

Unincorporated business and companies can benefit from a temporary extension in the period for which losses can be carried back from one year to three years for a limited period.  

For unincorporated businesses, the carry back will apply to losses incurred in 2020/21 and 2021/22.  

For companies, it will apply to losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and 1 April 2021 and 31 March 2022 (subject to a cap of £2m for each accounting period). 

Taking advantage of the measure to carry back losses incurred as a result of Covid-19 may generate a much-needed tax repayment.  

7. Recovery Loan Scheme 

A new Recovery Loan Scheme will launch on 6th April 2021 to help businesses raise between £25,000 and £1m with an 80% guarantee from the Government. The scheme will run until 31st December and loans will be available through a network of accredited lenders.. 

Personal guarantees will not be taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security. 

8. Restart Grants 

 Non-essential retail shops reopening in April will be eligible for up to £6,000 per site, pubs, gyms, and other businesses reopening in May will be eligible for grants up to £18,000

9. Green Recovery 

The Chancellor used the Budget to reiterate the UK’s commitment to a “net zero” target by 2050
 
The Government’s investment in green technology consists of £100bn in funding to support UK-wide competitions to develop offshore wind and energy storage, as well as the issuance of green gilts

10. Cap on R&D Tax Credits  

From 1st April 2021, the amount payable as cash back for the R&D Tax Credits SME Scheme will be capped at £20,000 plus 3x the company’s total PAYE and NICs liability for any one year. 

11. VAT  

VAT cuts for the hospitality and tourism sectors are to be extended, with the rate remaining 5% until September, rising to 12.5% until the end of the tax year in March 2022

Confirming the changes to deferral of VAT payments from 2020

The Registration threshold of £85,000 and Deregistration threshold of £83,000 are fixed until 31st March 2024

MTD for VAT registration will apply to all businesses from 1st April 2022. 

12. Business Rates 
 
The 100% Business Rates holiday will continue until the end of June.  

Business Rates will then be discounted by two thirds, up to a value of £2 million for closed businesses, with a lower cap for those who have been able to stay open. 

13. Future Fund 

A new £375m UK-wide fund will invest in high-growth innovative companies  such as life sciences, quantum computing and clean tech.  

14. Housing 

Stamp Duty tax cuts are now extended, with the nil rate band set to stay at £500,000 until 30 Sep 2021, then £250,000 until 31 March 2022, and then decreasing back to to £125,000. 

The Chancellor announced access to 95% mortgages up to £600,000 with a deposit of 5%, from major UK lenders starting in April. 

15. Community Ownership Fund 

This £150m fund will help UK local communities to invest in local businesses and assets such as pubs, theatres, event venues, shops and sports clubs. 

Further details will be published over the next few weeks. 

If you have any questions, please call 01904 404560

Stephen Perry & Co 

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Do I need an accountant to run my business?

I am often asked if I need an accountant to run my business, it is a good question.

Whilst managing your own finances can feel like a saving, finding a reliable accountant is an investment which will save you money and free up your time.

Some areas where a good accountant will help are:

Understanding your financial position to improve the decisions you make.

A clear understanding of your financial position will help you to know how your business is performing and what impact any changes you make will have on your profits and tax. Working with an accountant will help you have a clear picture of your finances and where you could make changes to increase your profits, improve cash flow or reduce tax.

Business records accessible anywhere

HMRC and Companies House require you to keep your financial records for up to 6 years. A good accountant will help you to keep your records organised and in digital form accessible anywhere to the standard HMRC expect.

Free up time to spend with your customers

Accounting standards, the rules for the content and layout of your accounts, change on a regular basis. Staying up to date with these changes and preparing accounts which comply with the rules takes time you could be spending with your customers.

Avoid late filing penalties

If you file your accounts or tax returns after the legal deadline HMRC and Companies House will issue late filing penalties immediately after the deadline has past. Sometimes penalties are imposed by mistake. An accountant can ensure you meet your filing deadlines.

Save time running your payroll

If you have employees you will need to complete a weekly or monthly payroll for each payment you make. You will need to send the payroll to HMRC in real time using software compatible with their systems. Preparing a payroll is specialist work often done more efficiently by payroll professionals. Accountants can run weekly or monthly payrolls for small through to very large businesses, with a wide range of payment types and ensure you hit HMRCs deadlines and tax requirements.

Avoid VAT errors

VAT rules are changing and require quarterly returns to be submitted using software compatible with HMRC systems, known as Making Tax Digital. Setting up the software to complete a VAT return is complex and time consuming. The legal rules covering VAT are also complex and can be difficult to interpret and to apply. A VAT professional can help save you time and money and keep your business compliant with the rules.

Do I need an accountant?

If your organisation is above the audit threshold you will need to engage an auditor, (for a limited company if your turnover is more than £10.2m) otherwise there is no legal requirement to appoint an accountant.

Smaller organisations are not audited, but are required to file tax returns and accounts and can be inspected by HMRC at any time.

There is no reason as a business owner you cannot manage your organisation’s financial affairs but to do so takes time away which you could be better spent with your customers and growing the business.

If you would like an experienced guide to help you maintain your business records and with filing accounts and tax returns do call us on 01904 404560 or email info@sjperry.org

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