How to Pay Yourself as a Ltd Company - Directors Salary 2020/2021 - Dividends vs Salary UK
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- čas přidán 15. 07. 2024
- The BEST WAY TO PAY YOURSELF from a LIMITED COMPANY is with a basic salary and dividends. In this video, I recommend the most tax-efficient director's salary for 2020/2021 and also compare paying yourself with a director's salary and dividends vs paying the same salary via PAYE.
In addition to this, I also look at the rates, thresholds and allowances for corporation tax, income tax, national insurance and dividends.
Although I am confident that this is the best salary to pay yourself as a sole director of a limited company in 2020/21, I strongly recommend discussing this with your accountant.
The Corporation Tax threshold in the UK for 2020/2021 is 19% - this as the same as last year. There were plans to reduce this to 17%, however, in a recent budget the government abolished this reduction so the corporation tax rate will continue at 19%.
Income Tax is paid on your salary excluding any dividends, the tax-free personal allowance for this year is £12,500.
The income tax bands are:
• Basic rate = £12,501 to £50,000 (20%)
• Higher rate = £50,001 to £150,000 (40%)
• Additional rate over = £150,000 (45%)
There are three National insurance thresholds that you need to be aware of when paying yourself as a business owner.
The Lower Earnings Limit (LEL) threshold is the point at which you qualify for state benefits such as your pension. As long as you pay yourself above this threshold then you will get your pension token every year.
• £120 per week
• £520 per month
• £6,240 per year
The National Insurance Primary Threshold is when as an employee of your Ltd company you start paying employees NI.
• £183 per week
• £792 per month
• £9,500 per year
The primary threshold is taxed at 12% between £9,500 and £50,000, and anything over that is taxed at 2%.
The National Insurance Secondary Threshold as your Ltd company (the employer) begins paying employers NI.
• £169 per week (was £166)
• £732 per month (was £719)
• £8,788 per year (was £8,632)
The secondary threshold does not have an upper limit so anything over £8,788 is taxed at 13.8%.
Dividends can be explained quite easily, they are only payable from current profits or retained profits from previous years and are only payable to shareholders.
The tax-free dividend allowance for 2020/2021 is £2,000.
It is also possible to draw additional tax free dividends if you haven't used up your personal tax allowance with your salary.
For example, if you pay yourself a basic salary of £8,000, that leaves £4,5000 unused from your personal allowance - this can instead be drawn as tax-free dividends.
The dividend rates for this year are:
• Basic rate = £14,501 to £50,000 (7.5%)
• Higher rate = £50,001 to £150,000 (32.5%)
• Additional rate over = £150,000 (38.1%)
In 2020/2021 you can earn £14,500 tax-free (£12,500 personal allowance plus £2000 dividend allowance), however, do not pay yourself £12,500 as a salary due to the double National Insurance liability.
The optimal way to pay yourself is a salary that is just under the National Insurance secondary threshold and then draw down the rest as dividends.
With this in mind, my recommend directors salary for a sole director with no other employment for 2020/21 is as follows (based on a £40,000 pay example):
• Recommended Salary: £732 Per Month / £8784 Per Year
(just under the £8788 NI secondary threshold but above the LEL threshold to qualify for benefits e.g. state pension)
• Dividends: From £8784 to £14500 = £5740 @ 0%
• Dividends: From £14500 to £40,000 = £25,500 @ 7.5%
• Total Dividend Tax = £1,912.50
Dividends vs Salary
Depending on your personal situation it can sometimes be more beneficial to pay the full salary via PAYE instead of paying yourself dividends, however, in most cases, it is more tax-efficient to pay yourself a basic salary and dividends as it avoids the double National Insurance liability of employers and employees NI that PAYE causes.
How do you pay yourself as a director of a Ltd business? Let me know in the comments below!
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I love that there's no fluff - you just explain it all concisely in 12 minutes. Perfect.
I've just come across after someone shared it on Facebook. Thank you for the information, and I'm now getting through the rest of your videos.
Wow. Glad this was on the YT recommendations.
This is amazing! A complete breakdown and straight to the point! This kind of content is so needed
What awesome content Darren; Seems like you've been presenting for years, really well delivered and recieved. Thanks my man! Bob :)
Thank you, the paye vs divi calculation was interesting. Lines up with what I've been told but it's the first time I've fully understood it.
Darren, mate, thats much better and clearer than any accountant. I can't thank you enough. Appreciate it
Brilliant, quick, to the point and as said before more than my accountant has ever told me!
I've been doing my own accountancy for a limited company for the last 7 years so I know what you are talking about. Amazing that you can cover everything in 12 mins. Very competent. Wish I'd heard this 7 years ago.
Amazing video, exactly what I needed and it wasn't too long at all, that was perfectly explained! Well done. Thanks
Thanks for watching Patrice 👍
Great job on breaking this down and presenting it so clearly.
Only 4 minutes I and never felt so obliged to comment. Wow this is so informative and relevant, great video!
Good vid, its exactly what my accountant has recomended
Some life changing information in this presentation, I'm working towards LTD Company and have spent some time typing out the information from this presentation and have delved into a Lawpack book to get the rest. The Pension bit was really helpful and I'm always dubious about giving money to someone who isn't necessary going to look after my needs as I get older. I'm now going to start paying myself a salary and grasp the bookkeeping in more depth. An excellent 10/10 presentation!!!
I’m really thankful. I’m just starting my limited company with similar figures to your example and this was clear and exhaustive. Thank you, I will definitely follow after this..
Thank you for taking the time to make this video and the clear presentation. 👍
Absolutely terrific video. Brilliant content, delivered in a quick no nonsense manner.
Absolutely brilliant vid. Thanks for the simplistic information there. Very much appreciated 👍🏻
Thanks for the support Carl 👍
I don't know who, but someone actually needs to hear this, you've got to stop saving all your money. Venture into investing some, if you really want financial stability.
Invest globally in bitcoin, gold, silver, forex market, commodities. Just don't be left out and save yourself.
Good talk I tell that to my friends everyday. Saving is good investing is much better, I used to think saving would save me but NO, saving is just keeping to spend later.
@@rodrigo2014 What if you don’t know how to trade any of these?
@@admin4895 I mean.... I see your point. Some people have money and are willing to invest but the problem is where to.
@@admin4895 This is 2021
People who aren’t even traders makes money from stocks, crypto and forex market.
Just starting up a business and the information explained in the manner you're delivering it is exceptionally insightful and priceless at this stage. Huge thanks
Been looking for this sort of explanation for a while now so thanks for the video
Finally someone who actually makes sense on this ltd stuff now I know what I can pay myself with my courier work
So helpful to have to up to date information explained in a straight forward way. Would be great if you could make a video on self employed VS limited company.
I have done both the self-employed sole trader , and now because of customer requirements have a limited VAT registered company. Both have their pros and cons , the self-employed sole trader as a construction industry worker I get tax deducted at 20% from the company I work for , as a VAT registered limited this very rarely happens, the advantages are that as a sole trader once the 20% is deducted the rest of the money is yours, as a limited company you are responsible for every penny and it's not your money it's the company's money.
This was brilliantly explained, clear and without any waffling. Thank you
Absolute gold! I finally understand why my accountant uses certain figures on my returns. Thank you so much!
this is so clear thank you!!!!
Thanks for watching Leah 😃
This video is absolutely excellent. I have returned to it so many times over the past year. Brilliantly put together, clear and concise. Jolly good show old chap! Hopefully you can do the same every year! Much appreciated.
Couldn't agree more john.
Fantastic, to the point, delivered at speed and so comprehensible. Thank you Thank you
Dude you are a life saver!!! Well done on these
I have an Accountant. He and his team are very smart.
Pure gold watching this. Really useful information here!
I’d love to see a breakdown with tax and NI with a limited company and a day job (full time) if it’s in the pipelines 🙂
He provides this at 9:20min in video
@@patrickholtz8122 No he doesn't, he clearly says that this is with no other income considered
Just want to say a massive thank you!
Very valuable information here 🙌
This video has answered so many questions that I have had while setting up a limited company and trading for the first three months. Grateful thanks.
So glad, the YT algorithm suggested your vid. So informative!
Hiya do you know how the alogrithim works please?TIAx
@@newwineskin5494 That is a trade secret unfortunately
Great info, accounts don’t always help u as much as they could,
///M SHAHID I would say you need to get a better accountant that offers basic tax planning.
A lot of smaller, cheaper firms will focus on churning out work as quick as possible to maximise fee income.
And half decent firm will make sure advice such as is given in this video is clear to their clients.
You get what you pay for really.
Don’t pay too little and don’t pay too much. A good accountant pays for himself.
Absolute quality, you have just made our decisions for us, great video for those of us new to running our own companies - huge thanks
Clear & simple, thank you for your time & effort.
This was so easy to understand, I think it's a benefit for us/me that you're not an accountant!! You made something hard to understand so digestible and easy to grasp. Thanks so much!!!!
Accountans are rip offs they want us to think that's is so difficult and hard to do so they can get they pays as for example confirmation statement takes 5min to do normally accountans charge 99+vat for that
@@mindisgl6556, you're paying for someone else's time and experience. As with every service you pay for, it's just a trade off between spending £100 once a year to get it right or spending a bunch of time yourself to find out all the details and also potentially get something wrong. Let's say you spend 10 hours the first year to research this, and 3 hours every year (including the first year) to actually file your tax return, and you value your time at £20/hour. Then it only becomes cost effective to do it yourself rather than have an accountant do it for you after you've done it yourself for 5 years.
@@mindisgl6556 Accountants are free as they come off your tax liability...why wudnt you?
IDK dude, this video still felt incomprehensible to me!
That was put across in an easy to understand way.
Good to know how much can be saved via running your own business.
Would be interesting to see how this works (dividends side of things) with others being a part of the business, such as a spouse or family member.
Thanks Dominic. If your spouse has shares then they are also entitled to the £2000 tax free dividend allowance, however, I haven't actually done this myself so definitely check the rules with an accountant 👍
Dividends are payable based on each persons shareholders %
@@HonestMoney is this the same as if U.K. getting rental income ? I make 40k in rental income Dudley I can pull out more than just 14k ?
This is by far the best explanation of how best to structure your company taxes in the most cost efficient way. Your method of verbal and txt via slides really helps to grasp the contents. Liked and subscribed. Keep up these great videos coming.
Where you being all my life just find your videos last night. Very informative thank you😃
Extremely clear an objective, well done! Great content!
This is outrageous, only been ltd for 3 months, and learnt more in this video than I have from accountant. They're not bad I just never understand why they do the things they do, it's good to be informed, thanks so much.
Just thinking of starting a business and this level
of clarity is invaluable. Thanks so much.
This is a great content. Could you expand on how to implement to this payment scheme a pension plan?
You forgot to mention a company pension. This is also a expense and can be used to lower your corporate tax. 👍
Your company can pay your pension ideally a SIPP 40k tax free. So no tax on first 40k. Basically if you’re smart you could earn 80k and only pay 5k tax
@@markwoolgar2781 Private pension is definitely the way to go to save tax upfront and give your pension more to play with. If you've paid off your mortgage and can get by on the £12,500 pa, you're laughing. Pay zero tax until you reach 55, then take 25% tax free lump sum and pay either zero tax on annuities up to the personal allowance or enjoy life a little more and pay the tax :) hopefully they don't change the rules! Apparently they're already agreed to increase the age from 55 to 57 in 2028.
@@voodoomotion5855 you should consider making a video about that. I'd gladly watch it and learn :)
@@Sani-hq5pl thanks, I think there's a fair amount about it online. Provided you don't need a lot to live and have some savings with short term access such as savings account and ISA, then it's advisable to invest as much as you can (up to around £40K) into your pension. Just be smart with what money you can afford to live without until retirement, but make sure you do enjoy the years between. I'm not a FA, this is my personal outlook based on my age, family and lifestyle. Best of luck
@@voodoomotion5855 That info is pure gold. Many thanks
Good video.
A lot of my clients (I'm an accountant) are brilliant at running their business but their eyes start to glaze over when discussing this level of detail.
Great video. It answered many of my questions. Thank you very much!
Very informative thanks, but, if I’ve modelled this correctly in Excel, paying salary of £9,500 and dividends of £30,500 delivers a slightly higher net figure of £32,194.24 (a whopping £37.78 more to blow on living the high life :)). By my reckoning this would incur £5,795 corporation, £98.26 business NI and £1,912.50 dividend tax.
Hi Andy, would you mind sharing your excel template and accounting template thankyou
What I've seen a lot of people do in my line of work was create different ltd companies for different functions ie manufacturing, warehousing, installation, retail. All of a sudden you have 4 sources of income from what is effectively one business.
I also have access to wage-rolls though and sometimes the disparity is quite enlightening. I remember seeing a swimming company which turned over £3m a year, 16 staff with a total wage-roll of £160,000 so average £16k each, the sole director's salary and dividends on the other hand were enormous comparatively.
But hey that's capitalism I suppose, it's just interesting looking at all the different companies and seeing who's generous/"values their people" and who makes Scrooge look like a philanthtopist.
The ones who are the actual shitbags though imo are the ones who's insolvency cases I come across, then you look at the statement of affairs and see £100,000s in unpaid employee wages. This is quite frequent in contracting companies. Imagine being one of those guys, employees are not secured creditors so they are quite far down in the pecking order when assets are being liquidated and creditors paid. I'm not an expert on this stuff by any means but personally I think it should be written into law that employees are secured creditors and preferably should be the first to be paid out of company assets as they need it far more than the bank etc.
Top class video & I like that you add back the corporation tax into the calculations as it before dividends. Comparing this to PAYE as well very informative. keep up the great content.
Absolutely brilliant video! Well explained, concise and to the point!
This level of simplicity in explanation (without jargon) is what I've been looking for almost a year. Two questions 1)can you please explain how an electric car purchase works out in an ltd company scenario? 2)do you recommend using an online tool (like QuickBooks) instead of an accountant for ltd company tax needs?
1. Is the electric car only going to be used for business purposes? Or also used by the director for personal use?
2. I would not recommend using a software instead of having an actual accountant. Find an accountant that has a good reputation, has qualification and has experience.
A good accountant will always be able to save you money. Much more than using just a plain old software.
~ from a part qualified accountant who has over 2 years experience in accounting.
Its a great informative video. Its shows how to work our system in a normal year in the UK. Sadly directors who have all employed this system, right now are not happy that dividends havent been covered as furlough scheme and getting no support - but thats the gamble they took, pay yourself in the most tax and national insurance efficient way paying less into the system, but now that system isnt paying them out. its a choice and risk.
Brilliant video, mate. Thanks so much.
Superb video. Clear and concise. Thank you
That's really amazing explanation, thank you for that Darren! What if somebody is an employee receiving around £35000 as a PAYE from his employer, how to pay himself as the director of his business?
I wouldn’t process yourself a salary through your limited company as you are utilising your personal allowances (£12,500) in your employment. I would just issue dividends from your ltd company. The first £2,000 will be tax free, which would take you to £37,000 then the next £13,000 dividends issued would be taxed at only 7.5% which takes you to higher rate which means any dividends issued from there will be charged at 32.5% (still less than 40% income tax in employment and no NI) until you hit £150,000 where you will be charged 38.1% on any dividends from there.
one thing I would like to point out is you're misted the benefit of using a pension fund.
You hit the nail straight on the head with this
THANK YOU!!!
Liked and subscribed
THE Most underrated video on CZcams!
Really good video. But one thing I thought of, wouldn’t the employers NI contribution be liable for CT relief as an allowable expense. So there would be a 19% saving on employer’s expense. Either way I know it’s still going to be more expensive.
Great point - yes the employer's NI is a tax deductible business expense so the gap would be a bit smaller than the final figures in the video 👍
Yeah my accountant recommends a salary of 9.5K as the NI is 13.8% compared to the 19% corporation tax so saves a few quid.
I contracted for a few years. Made so much money compared to being an employee. I was able to buy a house which I could never have done. Those good days are over unfortunately
Yes agree, IR35 spoiled the whole thing. I've had to go perm this year
@@stanleyandrew92 my worst nightmare. Had a few interviews and really didn't want to. Lucky I still found a few contracts
@@andybliss5965 are you in IT contracting, out of interest?
@@stanleyandrew92 I am. The thing is they ended up postponing till next year due to the circumstances. But there certainly are a lot less roles around
Such an easy intro. Subscribed!! Thank you
thank you. that was so helpful. you made it extremely clear
LTD, INC, LCC etc.. makes me laugh sometimes. Artificial rules and regulations to keep humans in check.
This video is great! So clear, it's cleared up a lot of questions I had and given me some extra knowledge I didn't know I needed. One question however...how does this apply to side hustles? So for example: someone earns £30k for their day job, what's the best course of action then?
Depends how much your earning on the side. Anything under 20k (I.e total income 30k + 20k) means your still sat at the 20% tax bracket. Setting up and running a limited co to make the 20k work for you isn’t worth it. You’re better off (if you want to be fully legit) declaring the additional income as self employed.
Still some admin as you need to register for self assessment , but not as arduous as the admin and cost associated with running and administering a limited company.
Brilliant clarity and very helpful. Thank you!
brilliant advise. i have been contracting for a long time and have learned some stuff you covered which i am going to take 'advantage' of from before!
If you were my maths teacher I would’ve got A* than the D I got. Great breakdown 👌🏾👌🏾
Thanks for the excellent explanation Darren, as a new sole director of a limited company I found it easy to grasp in plain English, nice and simple.
One query though, I've seen somewhere that the flat rate HMRC allowance for using your home as an office has gone up to £6 p.w,/£26 p.m. for 2020/21. Is that correct?
Thank you for the feedback and for the information, you are right 👍 I'll add a new pinned comment to this video with the correct information 😃
@@HonestMoney, It's been 4 months since you commented this.
There is still no 'pinned' comment.
(There are a few people who read through all comments)
This is so much appreciated!! Thank you!
They way you explain makes it easy to understand. Thanks.
That’s so good! My accountant needs to learn from you. Do you have some help about how to deal with directors’ pension. I will really like to start to remove my pension and from what I’ve heard there’s a tax efficient way of doing it but not sure how it all works?
Pay it directly from the company to your pension. Legitimate tax planning. Saves company the amount * 19%
Thanks Paul
Would love another example with someone with a second job for example they’re day job. Just a standard tax payer of £45000?
Your £12,500 personal allowance is split between all your jobs, so if you earn exactly £12,500 in job 1 then you will pay income tax on every penny you earn in job 2. (Your Tax code splits up this allowance between jobs)
However, there is a tax benefit to having 2 jobs as your national insurance threshold is granted per job. So essentially you will be granted two national insurance thresholds of £9,500 each.
Declan Reynolds do you have an example of what that double £9k national insurance allowance means, using JamesFlem’s £45K day job, and say another £25k from his business?
Daniel Harris So national insurance works different to income tax where, with income tax there is a single tax free amount available per person per tax year which is divided between all the jobs combined.
However with national insurance you get a new £9,500 allowance per job.
So if you had 10 jobs earning exactly £9,500 each you would never pay National insurance even though you are earning £95,000 a year.
However to work out the income tax you could do £95,000 - £12,500 tax free allowance = £82,500 taxable income (£37,500 @ 20% and the remaining £45,000 @ 40%)
So for your example of £45,000 in job 1 (£45,000 - £9,500) the remainder you will suffer NI on.
Job 2: (£25,000 - £9,500) the remainder you will suffer NI on
I am already a high rate tax payer with my normal job and run my LTD company on the side. What I do is pay no PAYE wages at all. I pay corporate tax on net profit and the rest is paid to family members who are share holders as dividends. This used to work quite well when the dividend limit was £5000 each. This year my wife will earn very little from her job so even the reduction to dividend limit to £2000 doesn't affect us because she can use her personal allowance.
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Yep, sounds good.
If your wife isn’t using her full personal allowance you can claim marriage allowance which will give you some of her personal allowance.
Ask your accountant about it if you have one.
Thank you Darren always so informative I’ve learnt so much from you 👍
Best guide I’ve seen yet. Great job mate
Im 19 and at college idek why im here.
You lucked out.
Stopped watching at the begining when £4per week for working from home in 20/21 was mentioned, which is an incorrect amount. Take only one bit of advice spoken early on here folks, don't listen to anyone unless they are actually qualified to discuss the processes to follow in a Ltd Co. This £4 is incorrect information, look it up, it changed in this year to a different amount. I expect further on it doesn't even mention the rules about what you are required to do in a Ltd company in order to take any dividends. Half stories can cause people big fines and penalties when HMRC pull apart what you have done half baked and demand taxes based on not following the correct procedure.
Thank you, sir! Simple and to the point!
This video is EXCELLENT!!! Thanks!!!
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Excellent video, thank you for sharing!
Clearest explanation of government tax gobbledygook I've come across. Thank you.
This is such a greta video! Thanks buddy
Thank you for this video!
Great video and succinctly put. Thank you and well worth the subscription!
Clarity, brevity, professionally presented, and very useful. Outstanding video. Well done.
Just spot on isn't it
Only starting on tbe Limited Company route. Many thanks for this. I have subscribed and forwarded this video to a friend.
Thank you! Great explanation and examples. All well explained and structured
Great video! you've given me some extra knowledge.
Really useful video, will have to watch a few times to fully understand it for myself. But know it will be a great help.
Very useful slides! couldn't have summarized it better! Comparison, in the end, was very useful. Thank you.
Thank you Mufis 👍
Excellent. Exactly the info I was searching for.
Love this, thank you for this video!
Wow. what a clear and precise information !,it was really helpful,thank you.
Really helpful video thanks. Efficient, straight to the point and slick presentation.
That’s very understandable and straightforward, very helpful
Possible the best video on youtube? Well Done Darren.
Absolutely Brilliant. Many thanks
Great vid, thanks. Liked, subscribed and hit the bell button. Please keep the no-nonsense, to-the-point style. Very English, and very refreshing from all the US fluff that we continually get!