As we enter the 2020/21 tax year, which began on 6 April 2020, the strategy of paying yourself a low salary from your limited company topped up with dividends remains as important as ever when seeking to minimise the tax take on your income. In fact, this strategy remains the lowest tax option. So the strategy to pay yourself remains the same but this blog article will explain how much you can pay yourself without incurring any income tax and national insurance charges.
How much should I pay myself?
The good news is that the monthly sum that we recommend you pay yourself has increased to £732 a month (up from £715 a month during 2019-20) which results in an annual director’s salary of £8,784. You should then pay yourself dividends on top of this low level of salary.
At this level of salary you won’t have to pay employer or employee national insurance contributions and no income tax will be due to be paid to HMRC on the wage you receive. The dividends you receive will be subject to dividend tax but a tax-free dividend allowance of £2,000 will apply during 2019-20.
What about the full personal allowance?
The total director salary of £8,784 is less than the personal allowance (£12,500) for the 2020-21 tax year but don’t be tempted to pay yourself up to the personal allowance as you will then end up paying more in tax.
If you pay up to the personal allowance you will be liable to pay national insurance contributions, both employee and employer contributions, that can be avoided at the £8,784 salary level.
The lowest tax option is to simply pay yourself dividends instead to use up the remainder of your personal allowance and then use the dividend tax free allowance. This means that you can receive a total of £14,500 tax free (personal allowance plus the dividend allowance).
If you need any further guidance in relation to extracting income from your limited company then feel free to contact one of our cheap accountants.