Does the company have one or many directors? If many, then the employment allowance for employer national insurance is available (as long as the directors are paid above the secondary threshold for Employer National insurance). Employment allowance will reduce the amount of employer national insurance that needs to be paid by up to £4,000 p.a.
Does the company owner have a spouse who has an unused portion of basic rate allowance?
How can owner managers plan the most tax efficient strategy?
Sole director companies
For 2021-22 a sole director should pay a salary just over the primary National Insurance threshold of £9,568. A round amount is therefore £800 per month.
Then withdraw any further cash from the company via dividend.
There will be a small amount of National Insurance to pay by April 2022 of £109. By paying National Insurance there will be a qualifying year for State pension.
There will be an impact on income tax with more dividend income being paid – if the income tax payable exceeds £1,000, payments on account will need to be made in January and July of each year which have a cash flow impact in the first year of making payments on account. This is because there is a switch to HMRC collecting income tax in advance as opposed to arrears.
Sole director plus employee(s))
Where the company has a sole director and shareholder but also has employees (earning above the secondary National Insurance threshold), the director should be remunerated with a £12,570 annual salary and further profits extracted by way of dividend, as long as the director does not have other income classed as earned income (which would be subject to the Scottish income tax rates).
Companies owned by multiple directors (or director plus employee(s))
For companies owned by two or more directors, the more complex income tax system for Scotland now means tax planning must be done specific to their particular personal circumstances.
Where a company is owned and managed by more than one director, existing sources of income (e.g. rental property, investment income) need to be considered for each specific director and, if relevant, their spouse and this may have an influence on how to set salary and dividend payments for the company for 2021-22.
I have modelled a scenario for a Limited company, with both directors owning a 50% share of the company each. Based on two different operating profit levels of £30,000 and £70,000, the optimum tax/ dividend split is to pay a £12,570 annual salary to both directors out of the Limited company and extract any further cash out of the company as dividend which will be split equally.
The UK basic rate threshold (as opposed to the Scottish threshold) of £50,270 (£37,700 + £12,570 personal allowance) will apply because dividend income is savings income.
In this scenario, £100,540 profits can be extracted out of the company at basic rate and the corporation tax liability will be reduced by £2,388 per individual salary. The employee National Insurance payment due will be £360 each i.e. £720 in total, payable quarterly in January and April 2021 (employment allowance is available for Employer National Insurance).
A summary of relevant tax rates for Scottish registered companies in 2021-22 is shown below:
Scottish intermediate rate threshold (for earned income not savings income)
UK-wide basic rate threshold (for savings income e.g. dividends)
Class 1 National Insurance rate – employee
Class 1 & 4 National Insurance secondary threshold (no employer National Insurance payable below this threshold)
Dividend allowance –nil rate
Dividend tax rate –basic
Dividend tax rate –higher rate
Dividend tax rate -additional rate (dividends over £150,000)
Scottish starter tax rate (earnings up to £2,097)
Scottish basic tax rate (earnings from £2,098 to £12,726)
Scottish intermediate tax rate (earnings from £12,727 to £31,092)
Scottish higher tax rate (earnings from £31,093 to £150,000)
Scottish top tax rate
If you would like to talk more in more depth about tax planning for your own limited company please call or drop me an email.
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