We’re almost at the end of the tax year on 5th April, and by now you should have though about the impact on the current tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year.
You will also want to stay up-to-date with the relevant tax rates and thresholds, many of which were announced in the Budget that was held on 3rd March 2021.
Limited company directors
Self-employed sole traders
Limited company directors or sole traders
It’s vital that any dividends you wish to take from company profits are issued by your company before 5th April 2021 to be included in your personal Self Assessment with HMRC for the 2020/21 tax year. This will help maximise your tax-efficiency by fully utilising your personal tax-free allowances and HMRC tax thresholds when combined with any director salary you take.
The tax-free Dividend Allowance of £2,000 has not changed for a number of years, but the Personal Allowance and tax thresholds affect the amount of tax you’ll pay on any dividends you take. The 2021/22 and 2020/21 rates and thresholds are shown below.
|Dividend tax-free allowances and thresholds||2021/22 tax year||2020/21 tax year|
|Dividend tax-free allowance||£2,000||£2,000|
|Dividend basic rate – The lowest rate of tax on dividends||7.5% on dividend income up to £37,700||7.5% on dividend income up to £37,500|
|Dividend higher rate – The middle tier of tax on dividends.||32.5% on dividend income above the basic rate up to £150,000||32.5% on dividend income above the basic rate up to £150,000|
|Dividend additional rate – The top rate of income tax for high earners.||38.1% on dividend income above £150,000||38.1% on dividend income above £150,000|
Note: The dividend basic and higher rate amounts assume all of the Personal Allowance is utilised.
For the 2020/21 tax year, provided your only personal income before dividends is a salary of £8,788, which is the 2020/21 tax year National Insurance (NI) secondary threshold, then you can take up to £5,712 in dividends tax-free. This is calculated as follows and means your total tax-free income is £14,500 (£8,788 salary plus £5,712 in dividends).
|2020/21 tax year||£|
|Tax-Free Personal Allowance||12,500|
|Less tax-free salary (paid at the NI Primary threshold)||(8,788)|
|Remaining Tax-Free Personal Allowance||3,712|
|Tax-Free Dividend Allowance||2,000|
Basic Rate threshold and tax 2020/21 tax year:
The Basic Rate tax threshold for 2020/21 is £50,000. If you have taken £14,500 in a combination of tax-free salary and dividends (see above), you can issue further dividends of £35,500 and remain within the basic rate threshold of £50,000. These dividends will be taxed at 7.5%. The total dividends issued will be £41,212 (£5,712 tax-free plus £35,500 at the basic rate of tax).
Higher Rate threshold and tax 2020/21 tax year:
The Higher Rate tax threshold is £150,000. However, when your income is above £100,000, your personal tax-free allowance is reduced by £1 for each additional £2 you earn above £100,000. Your tax-free allowance is therefore removed completely when your income is £125,000.
Having issued dividends of £41,212, to reach the basic rate threshold, you can issue further dividends of £100,000 and still remain within the higher rate threshold. These dividends will be taxed at 32.5%. The total dividends issued will be £141,212.
Additional Rate of tax 2020/21 tax year
Once your total income is above £150,000 then further dividends will be taxed at 38.1%.
If you have other sources of income, such as rental income or dividends from other companies, then you will reach the threshold limits more quickly and more tax may be due. Get in touch with Lera accountancy if you’re unsure about any of this.
When issuing dividends, it’s important to make sure that your accounting records are up to date, so that you only issue dividends from company profits after Corporation Tax has been accounted for. You need to make sure all your transactions have been recorded in your business bank account and that you’ve reconciled this, with all expenses, pension contributions, salaries, and sales invoices that have been issued.
Once your records are up to date, you’re able to make an accurate assessment of your company profits and any Corporation Tax due. You can then calculate the dividend you can pay yourself and other shareholders.
Don’t forget that any dividends must be paid from available company profits. If you take more than is allowed, you could face penalties and interest as it’s treated as a Director Loan.
If you’re running a regular payroll, even if it’s just for you as a single director/employee, then you mustn’t forget to file your final Full Payment Submission (FPS). This is an HMRC Real Time Information (RTI) requirement and you could face a £100 fine if you don’t file your end of year Full Payroll Submission (FPS) by 5th April 2021.
If you’re a Lera accountancy client then this is handled directly by our accounting software.
You should record a payroll run for March 2021 to maximise your tax-efficient salary, if you have no other sources of income, this would mean paying yourself up to the NI Primary threshold of £8,788 for the 2020/21 tax year. It’s therefore worth checking the amount of salary you have been paid in the tax year to date (since 6th April 2020).
With many limited companies choosing to have 31st March as their financial year end, it can be a daunting undertaking for first-time limited company directors, but with our comprehensive year end checklist you’ll know exactly what you need to do.
Sole traders have it slightly easier as they don’t need to worry about dividends or payroll and RTI filing (unless they have any employees). We’d still always recommend you make sure that you’ve issued all your invoices and recorded all your expenses, so that when it’s time to file your Self Assessment for the 2020/21 tax year everything is ready.
If you’re a Lera Accountancy Sole Trader client this should be simple, and once the new tax year starts you could file your Self Assessment straight away, unless you need to wait for any paperwork for any other sources of income you may have.
Whether you’re a limited company director, or a sole trader, there are a few more things you need to think about.
If you want to make pension contributions this year, you need to make sure these payments are received by your pension provider by 5th April 2021.
If you run a limited company then making payments through your limited company is usually more tax-efficient. You can also pay into your pension through your monthly payroll or make lump sum contributions periodically throughout the tax year.
As a sole trader you just need to pay directly to your pension provider.
The total amount that can be contributed per year and still be tax-free is £40,000. Up to that limit, the government provides tax relief at the basic rate of 20% and this is added to your contributions by your pension provider.
If you are a higher rate taxpayer, you can claim further tax relief through your annual Self Assessment return. You are allowed to include the full £40,000 amount on your Self Assessment and the government will provide further tax relief of 20% (if you pay tax at the higher rate of 40%). So you claim back £8,000 from the government through your annual Self Assessment.
Don’t miss out on Pension Tax relief
If you’re a higher rate taxpayer, and you make contributions personally, your pension pot can be topped up by £1,000 and it would cost you £600 after tax relief. As a basic rate taxpayer, your pension pot can be topped by £1,000 and it costs you £800.
While you’re thinking of future investments, you may want to check if you could make any payments into an ISA or other tax-efficient savings which also have limits on what you can pay in each tax year.
The government is introducing some important changes to the rules surrounding IR35 in the private sector that could affect contractors working through their own limited company. These, and other changes, will be introduced from 6th April 2021, as shown in the following updates:
We also have an article with highlights from the 3rd March 2021 Budget.
All of the above comments are for your information only. We always recommend speaking to an accountant for a more in-depth analysis of your circumstances. If you don’t have an accountant or are looking to switch, give our friendly Lera Accountancy team a call on 01865 661 960 or arrange a free consultation.
We have a great range of accountancy packages that come with all the support and advice you need to make keeping on top of your finances.