![Director's Salary and Dividends 2020/21 (wide). Photo credit © L Rowe 2020](https://www.1ndexate.com/wp-content/uploads/2023/03/Directors_Salary_Dividends_2020_21-_wide-1024x538.jpg)
As we start a new tax year, the question of what directors of their own limited company should pay themselves arises.
Since the coronavirus/covid-19 crisis, this has taken on new significance, as directors who are able to furlough themselves can only claim 80% of their PAYE salary through the coronavirus job retention scheme.
This is relevant for sole directors of their own limited company, where the director is the only shareholder and the director’s only source of income comes from the company and the director is not in the additional rate tax band for personal tax.
Where the director is the only shareholder, it is necessary to look at the overall tax burden of personal tax, corporation tax and national insurance (both employees and employers)
Scenario 1
Pay a salary at the National Insurance Primary Threshold £9,504
This gives the lowest overall tax burden but does mean that around £100 of National Insurance would be payable in April 2021, which is nine months earlier than the corporation tax would be due.
Scenario 2
Pay a salary at the National Insurance Secondary Threshold £8,784
This results in around £57 more tax being paid (even after taking the addtional £100 of national insurance). This is because employers national insurance is payable at 13.8% and is tax deductible against corporation tax, whereas the corporation tax rate is 19%
Scenario 3
Pay a salary at the personal tax allowance of £12,500. This results in around £125 more tax being paid, compared to the first scenario.
Scenario 4
Paying any salary above the personal allowance will result in more tax and national insurance being paid.
Dividends
The tax free dividend allowance remains at £2,000 for 2020/21. This means that any dividends over £2k will be taxed at:
- 7.5% if you are in the basic rate tax band
- 32.5% if you are in the higher rate tax band and
- 38.1% if you are in the additional rate tax band
Traditionally, dividends are used to extract income from a limited company without paying national insurance.
From the above, we can see that Scenario 1 would be the optimal for tax purposes.
But as we’ve seen from the recent government support for Coronavirus, tax isn’t the only consideration. For example, a furloughed director on £9.5k would only receive £633 from a future coronavirus job retention scheme, if one were launched on the same basis as the current scheme.
Additionally, some people opt to trade via a limited company because of the “limited liability” it provides, protecting and separating personal assets from their business. Others find that it is a requirement of working with their clients.
If you are a contractor within IR35, other restrictions will apply to you which will mean that the above scenarios are not going to applicable to you.
![Director's Salary and Dividends 2020/21 (pin). Photo credit © L Rowe 2020](https://www.1ndexate.com/wp-content/uploads/2023/03/Directors_Salary_Dividends_2020_21-_pin-683x1024.jpg)
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