Most effective salary / dividend combination in 2020/21

Limited Company Directors - Salary and Dividends 2020/21

To achieve the most tax efficient way of extracting money from your limited company you should consider a mix of salary and dividends.

How much salary should you pay?

From April 2020 you can pay yourself a salary of £732 / month without paying any tax or NI.

If you choose this option:

· You receive National Insurance Credits towards some benefits for example state pension

· You must be registered as an employer

· You must file an RTI (real time information) return to HMRC each pay period

· No income tax or national insurance is due on a salary at this level

· For the majority, this is the most tax efficient way of paying yourself from your company

Dividends – 2020/21

Any dividends paid over £2,000 will attract dividend tax.

The rates of tax will be:

· First £2,000 of dividends – tax free

· 7.5 % for dividends falling within basic rate tax (caution on how this is calculated)

· 32.5% for dividends falling within higher rate tax (which is over £50,000 in 2020/21)

· 38.1% for dividends falling within the additional rate of tax with income over £100,000 meaning restrictions on your personal allowance