For the 2021/2022 tax year, tax allowances and rate bands have, in the main, remained the same. In this article, we demonstrate what that means in real terms, and offer our advice for trading as tax-efficiently as possible.

3 ways to trade tax-efficiently for 2021/2022

Use the optimum salary levels for 2021/22

There are two main scenarios for salary levels if you are the Director of your own limited company. In the majority of cases, the salary level should be:

• £12,570 if you have more than one employee in the Company (e.g. a spouse). Having more than one employee through the business will mean you can continue to claim the employment allowance. This will reduce the employer’s National Insurance payable.
• £8,840 if you are the only employee in your Company. The employment allowance is withdrawn where the Director is the sole employee. A salary of £8,840 will still give you a qualifying year for state pension entitlement.

Corporation Tax relief is available on the salaries as they are treated as a business expense. The salary levels are below the personal tax free allowance.

Increase the amount of dividends being taken from the Company.
The basic rate tax band has increased by £270 to £50,270. This means you can have total income of £50,270 before you pay higher rate.
The optimum amount of dividends for most people in each tax year will be:

• £37,700 per year (6 April to 5 April) or £3,141 per month, if on a salary of £12,570 per year
• £41,430 per year (6 April to 5 April) or £3,452 per month, if on a salary of £8,840 per year

You must take account of any other income you receive (e.g. rental profits, bank interest, other employment income etc) and reduce the dividends accordingly if you want to remain below the higher rate tax threshold.

Don’t take more out of the Company than you need

The main tax planning opportunity for limited company directors has not changed. You have the flexibility to decide how much tax you pay by increasing or decreasing dividends. The most tax-efficient method will be to take dividends and salary based on the advice in points 1 and 2 above and for any extra profit to be left in the Company if not needed.

What happens to the money saved within the Company?

You have a few options with this:

1. Make investments in the Company name e.g. shares, bonds, property. Although it is worth getting advice from us first to ensure the trading status of the company is preserved.
2. Make other larger one off dividend payments and paying the higher rate (32.5%) or additional rate (38.1%) tax. There are ways to mitigate this as well. For example income tax relief on EIS, SEIS and VCT investments.
3. Leave the money in the Company. When you come to cease contracting you could either:
   • Draw out £2,000 per year tax free
   • Liquidate the Company and draw out the total profits in one lump sum at 10% tax rate using Entrepreneurs Relief subject to the new 2 year rule
4. Contribute to a pension scheme. This option is becoming more and more appealing now – especially for those approaching 55 who could draw down on it at that age. The tax relief is two-fold; the Company would receive Corporation Tax relief at 19% and you, personally, would draw less from the business in dividends.

What else do I need to think about?

Payments of dividend tax
The tax on dividends is a personal tax liability and will be payable annually as part of your Self Assessment tax return calculations. This will be due by the 31 January following the end of the tax year. Once you have taken account of any other income, tax on dividends is at the following rates:

The first £2,000 in dividends will be tax free. Above this dividends will be taxed at:

• 7.5% for basic- rate tax payers (on dividends falling below £50,270)
• 32.5% for higher-rate tax payers (on any dividends above £50,270 per year)
• 38.1% for additional-rate tax payers (on any dividends above £150,000 per year)

Payments on account
If you had not paid tax (or had a liability below £1,000) under Self Assessment previously you will have not had to make payments on account. It is likely however that you will now be bought within the payment on account regime. Payments on account are payments towards the following tax year.

For example if you had a liability of £2,000 for the year ended 5 April 2020, your tax payable would be:

Due 31 January 2021 – £3,000.00 made up as:

• £2,000.00 – tax due for the year ended 5 April 2020
• £1,000.00 – 50% of tax towards the year ending 5 April 2021

Due 31 July 2021 – £1,000 made up as:

• £1,000.00 – remaining 50% of the tax towards the year ending 5 April 2021

Corporation Tax Rate
The Corporation tax rate will remain at 19%.

What are the next steps?
Ahead of the new tax year we will be taking a look at each of our client’s individual circumstances and will be advising adjusting salary levels to the figures shown below:

• £12,570 per year if more than one employee through the Company
• £8,840 per year if only one employee through the Company

The payroll summary will be emailed at the start of the new tax year in April 2021.