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.