How to pay yourself in 2021/22?
With each tax year there are a number of changes businesses owners need to make in their business, one of these is the most tax efficient level of remuneration. This owes to the fact that each tax year the relevant tax free allowances change as part of the annual budget. This year is no exception with changes to the Personal Allowance and National Insurance bands. We have produced guidance which can help with steering you in the right direction when it comes to paying yourself.
There are many points to consider when arriving at the most tax efficient amount to pay yourself from your limited company. However, you must bear in mind that the optimum mix of remuneration methods will be dependent on your personal circumstances.
The first method of extracting funds from your limited company is by a salary. The company will receive Corporation Tax relief on the salary expense and any Employer’s National Insurance paid. You as an employee receiving the salary will be subject to Income Tax and Employees National Insurance. The most tax efficient salary in a limited company with no other employees and only a single director on the payroll will either be £8,840 per annum or £9,568. These are the Secondary, and Primary, Class 1 National Insurance thresholds. This means that where the salary paid is below these thresholds no NI will be due. On the small difference between the two thresholds of £728 there will be Secondary NI due at 13.8%, however this is still tax efficient as it lower than the rate of Corporation Tax should funds be retained within the company.
It is worth mentioning that a PAYE scheme will likely need to be set up and administered, along with monthly payroll filings.
Where there is more than 1 director on the payroll and the Employment Allowance becomes available (which covers the first £4,000 of Employers NI) it often makes sense to take a salary of up to £12,500.
Amounts over and above this salary are often suggested to be taken as dividends from the company. These will be paid out of post-tax profits, meaning you need to allow for any Corporation Tax due when assessing the amount of retained earnings available for distribution as dividends.
The first £2,000 of dividends will be tax free by utilising the Dividend Allowance. After this they will be taxed at 7.5% where they fall into your Basic Rate Band, 32.5% in your Higher Rate band, and then 38.1% as an Additional rate taxpayer.
Other ways to tax efficiently take funds from your limited company can also include paying interest on any directors’ loans made into the company, these are generally free on any National Insurance. They are subject to Income Tax but benefit from being tax deductible within the company. The same is true of rents paid toward commercial premises owned personally but from where your business is operated from. Care must be given as charging rent here can preclude the availability of Business Asset Disposal Relief on the sale of the property.