The new financial year started on 6th April 2020. One of the main questions that arise during this time of the year is “what is the optimal salary for a sole director company?’. We have provided a few bits of guidance below.
For tax year 2020/21, personal allowance remains at £12,500 and Dividend allowance of £2,000 remains unchanged.
As part of the 2020 Budget, Chancellor Rishi Sunak announced National Insurance thresholds for 2020/21 tax year will be increased. Employed workers will be able to earn up to £9,500 in 2020-21 before National Insurance contributions (NICs) kick in. However, for Employers National Insurance (also known as Company National Insurance) NICs kicks in when income exceeds £8788 (previously £8632).
It is to be noted that employer allowance of £3,000 cannot be claimed if you are sole director company so it is advisable not to process payroll at £12,500. The choice then is to either process a payroll for £8,788 or £9,500.
Assuming a sole director takes £37,500 as Dividends, the table below depicts tax consequences.
Case for paying £9,500 rather than paying £8,788.
Paying £9,500 will result in £153.95 Corporation tax saving (£1823.67 less £1669.72). This however will increase Dividend tax by £53.40 (£2,437.50 less £2,384.10), resulting in a net saving of £100.55 (£153.95 less £53.40).
Note: The limited company has a liability to pay Employers NI of £98.24 at the end of the tax year.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation o seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.