The most tax efficient remuneration strategy for 2020/21
Following on from last year’s budget, I was asked by many contractors how it will affect the most tax-efficient way for them to pay themselves in the coming year. Of course, I could just rattle off the figures that the Chancellor announced, but that is what an ordinary accountant would do… I would prefer to give you a practical breakdown and a pound-for-pound ‘how to’ or ‘what to do’ response.
Watch my updated remuneration planning video below for an overview. Then read the rest of this article for guidance on the most tax-efficient salary and dividend payments to take as a business owner.
Have you got your pen and paper ready?
From April of 2020, the most tax-efficient remuneration strategy for a contractor will be to pay themselves £4,166 per month and to save £222 per month of that amount to cover the personal tax bill that will follow in due course. Therefore, the breakdown is as follows:
Monthly salary: £792 per month
Dividends: £3,374 per month
Put aside for tax: £222 per month
*these figures are rounded up to the nearest pound.
If you do this, you will use up all of your personal allowance and basic rate tax band without going into the higher rate tax bracket of £50,000 as set by the latest budget. These figures are based purely upon the earnings that you take from your business, and do not take into account any other income that you receive from areas such as interest on savings and investments or rental income. As promised, this is a not a technical, over-complicated blog post, so please call the office if you would like to know how any additional incomes will affect the numbers above.
For clarification: the £222 per month is representative of the 7.5% dividend tax and we always recommend to our clients that they save this as they go. The truth is that it was never your money in the first place – so don’t spend it. Save it wisely and you might even make a few pounds of interest at Her Majesty’s pleasure.
Get greedy and get expensive!
Here is the bad news. Obviously, if you have got a significant need to take more than £4,166 per month from your business, you might need to get a little more creative, investigate some other strategies, or just bite the tax burden bullet. If you choose the latter: these are the costs you will incur.
For every £1,000 that you pay yourself in dividends, over and above the £3,374 per month, you will be liable for £325 at the higher 32.5% rate of tax. And if you go really wild and end up topping the £100,000 per year barrier, your rate will skyrocket into unspeakable stratospheres – in fact, it is so expensive that I can’t even bring myself to mention the numbers here!
Just in case you do want the Chancellor’s numbers again:
Most of my customers want announcements like The Budget translated into practical steps, as above. As a simple summary of the bottom line: this is what you need to do so that you will be better off at the end of the day, month, year and lifecycle of your working life.
But I know there will be a few who want the original numbers too…
- The personal allowance has remained at: £12,500
- Size of the basic tax rate band has remained at: £37,500
- Which means that the new Higher Rate Tax bracket is still: £50,000
- And the Dividend Tax Allowance has remained static this year at: £2,000
If you have any questions, please get in touch.