Optimum salary for company directors in 2020-2021

Salary & dividends for director

At gHawk Accounting we believe the business is there to serve the owners, and not the other way round. One of the advantages of being a business owner is that you can set your own pay package at a level that meets your lifestyle needs and keeps tax to a minimum. In this article we will cover the optimum options for paying yourself with a combination of salary and dividends while maximising on your untaxed allowances.

What are dividends?

‘Dividends’ is the name given to money paid out to investors who own shares in a company. These investors are called Shareholders. Dividends are the distribution of a company’s residual profits after tax. As a shareholder, you may take dividends as a form of remuneration. Dividends are taxed differently to your salary. 

New tax rates:

Every tax year the government announces the tax rates for the financial year. It is important to know the prevailing tax rates when deciding how to pay yourself and how much to pay yourself as this will have an impact on how much tax you pay. This is called tax planning. For directors who are also shareholders, the best strategy is usually a combination of a salary and dividends.

For 2020-21, personal allowance (tax free earnings) remains £12,500 same as 2019-2020.

The tax rates for 2020-21 are as follows:

  • £12,501 to £50,000                          20% 
  • £50,000 to £150,000                        40% 
  • £150,001 +                                        45%

Dividend allowance remains at £2,000 and any dividends in excess of that will be taxed as follows:

  • You won’t pay tax if your unused personal allowance covers the additional dividend taken
  • Dividends in the basic rate tax band will be taxed at 7.5%
  • Dividends in excess of basic rate tax band will be taxed at 32.5%
  • Dividends within the additional rate band (income over £150,000), will be taxed at 38.1%

Most company directors will opt to pay themselves enough of a salary to satisfy their National Insurance stamp in order to protect future entitlement to state pension. Additional funds are then taken as dividends for maximum tax efficiency. When paying corporation tax, your company will save 19% on any salary taken. The director then takes dividends, which do not technically save on corporation tax, as they are declared after tax – but they do save on National Insurance as dividends are NI exempt.

Employment Allowance

Employers can claim are able to claim the Employment Allowance (EA) in order to reduce their employer Class 1 National Insurance contributions. The rules regarding which businesses qualify for the EA changed from April 2020. 

From 6 April 2020 the Government has proposed that the EA will be £4000 an increase from £3000 in 2019-20  

To be eligible for Employment allowance:

  • the company must have more than one employee on payroll who is not a director
  • and the employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.
  • If part of a group or have multiple PAYE Scheme, the total employers’ Class 1 National Insurance liabilities for the company or group of companies must be less than £100,000
  • If receiving state aid, the Employment Allowance claimed must not exceed the de minimis state aid threshold for your sector

Optimum Directors Salary 2020-21 – Option 1

When it comes to tax efficient salary levels for 2020-21 there are now three national insurance thresholds you need to be aware of

  • Lower Earnings Limit – if you pay a salary above this you are protecting your entitlement to future state pension and benefits, without paying any national insurance. For 2020-21 this is £520 per month, £6,240 for the year
  • Primary Threshold – if you earn above this you personally must start paying national insurance – for 2020-21 this is £792 per month, £9,500 for the year
  • Secondary Threshold – if you earn above this your business must start paying national insurance – for 2020-21 this is £732 per month, £8,788 for the year

A major change for the 2020-21 tax year is that the Secondary Threshold is lower than the Primary Threshold – this means that the optimum level for the purposes of this article is to go up to the Secondary Threshold but not any higher.

Therefore, we would suggest a monthly gross salary of £732 which stays just below this threshold and means no national insurance deductions. This way you pay yourself a salary of £8,788, you can then take dividends of up to £41,212. (Which is within the basic rate band of £50,000). These dividends will incur £2,663 of tax.

Overall, you will take home £47,337 after tax – with a saving of £1,670 in corporation tax.

Optimum Directors Salary 2020-21 – Option 2

If you can claim Employment Allowance, there is a little more administrative effort involved in this process, but you will still save money.

If you pay yourself a salary on £12,500, you will pay employers National Insurance – at £512.26. When taking £12,500 in salary, your Employment Allowance cancels out your employers National Insurance contribution. You will still have to pay employee’s National Insurance at the lower rate of £360. Leaving you with a corporation tax saving of £2,375 less the NI of £360 – hence overall you will be £345 better off compared to Option 1 above.

Comparing the two options:

  Option 1 Option 2
Salary            8,788          12,500
Dividends          41,212          37,500
Total          50,000          50,000
     
Employees NICs on salary                   –                  360
Employers NICs on salary                   –                  512
Employment allowance                   –   –             512
Tax on dividends            2,663            2,663
Corporation Tax saving –         1,670 –         2,375
Total tax                993                648
     
Take home          49,007          49,353
Option 2 is better off by:                  345

If you’d like to know more about how you can maximise your earnings and take advantage of tax efficient planning, please get in touch today.

Support available for businesses due to COVID-19

The impact of the ongoing coronavirus pandemic on businesses is unsettling and evolving fast.

At gHawk Accounting, we are working hard to support our clients starting with those with the greatest need. Our team is fully set up and working from home as our software is cloud based and can be accessed over the internet.

Below is a summary of the help available from the government to support businesses affected by Covid-19.  We will continue to update this page as more information is released on the support schemes available, who is eligible and how to get the assistance.

Full details are available on this government page

Ask gHawk: COVID-19 Frequently Asked Questions

We will update this page with questions we are receiving from our clients, so feel free to message us with your question and we will add to our Frequently Asked Questions.

Am I self-employed or employed?

A self-employed person trades in their own name as opposed to through an intermediary e.g. a recruitment agency of company. So, if you are a director or shareholder of a limited company and the company runs a Pay As You Earn (PAYE) Scheme – then you are an employee, and not self-employed

How do I get the support if I am self-employed?

You can claim a grant of up to £2,500 per month through the coronavirus (COVID-19) Self-employment Income Support Scheme

How do I access the grants recently announced?

Refer to the image above -your local council will write to you if you are eligible.

What taxes can I defer

You can defer VAT payments from 20 March 2020 to 30 June 2020. Income tax payments due under the self-assessment system may be deferred until January 2020. If unable to pay any other taxes, you should apply for a Time To Pay arrangement by calling HMRC on 0800 0159 559

What if I can’t pay the rent for my commercial property

The government has introduced Protection from eviction for commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction.

These measures will mean no business will automatically forfeit their lease and be forced out of their premises if they miss a payment up until 30 June.

There is the option for the government to extend this period if needed.

This is not a rental holiday. All commercial tenants will still be liable for the rent. Commercial tenants are protected from eviction if they are unable to pay rent.

I am an employer and may have to lay off employees as our work has run out. What should I do?

You can access up to 80% of your employees’ wages up to £2,500 per month through the Coronavirus Job Retention Scheme. This allows an employer to ‘Furlough’ their employees for up to 3 months from 1 March 2020. Furloughed employees cannot provide services to a business, otherwise a claim cannot be made under the scheme.

I am a director of a company and pay myself a salary and dividends. Are my dividends covered by the coronavirus job retention scheme?

No Sadly dividends is not covered by the scheme, but your salary is.

How can I apply for the Corona Virus Business Interruption loan?

All major banks are now offering the scheme. Speak to your bank or visit the British Business Bank website to find out the participating banks.

Millions to get Tax Cut from April 2020

Tax changes for new tax year 2020/2021: Tax Cut from April 2020

New legislation introduced in January 2020 will see millions of taxpayers save around £100 in the financial year 2020-21. This is following the increase in the National Insurance Contributions threshold to £9,500 from April 2020. The previous threshold was £8,632 for the financial year 2019-20.  

Chancellor of the Exchequer Sajid Javid said: 

We’re determined to do what we promised and put more money into the pockets of ordinary hard-working people. That’s why we’re starting this government as we mean to go on, by cutting their bills. 

We want everyone to feel that they can contribute to the new chapter we are opening for the economy and our country because under this Government work will always pay. 

This is certainly good news for taxpayers and especially the self-employed. It is the equivalent of receiving an extra £100 in your pocket. Tell us – what would you do with an extra £100? We would love to find out. Leave your comments on our website

Changes For VAT Registered Businesses Post Brexit

VAT Registered businesses post Brexit 

The UK left the European Union on 31 January 2020. From 1 February 2020, the UK enters a transition period that lasts until 31 December 2020.  

VAT registered businesses who trade with the European Union are required to register for an Economic Operator Registration and Identification (EORI) number. This application can be done online via this website www.gov.uk/eori 

There will also be a requirement to make customs declarations following the end of the transition period. Businesses are advised to start planning for this e.g. buy appointing someone to deal with customs on their behalf. 

More information about these changes can be found on HMRC website. Let us know if this affects your business and we can provide further assistance. 

Off-payroll working (IR35) rules affecting the private sector

Tax changes for new tax year 2020/202: Off-payroll working

From 6th April 2020, contractors working through a Personal Service Company, or Recruitment Agency providing services to Medium and Large businesses will be at risk of being deemed to work as an employee.  

The end client is responsible for determining whether a contract is inside or outside of IR35. This change in legislation does not affect small businesses. According to Companies Act 2006 a small business is defined as one which meets two or more of the following criteria:  

  • Annual turnover is no more than £10.2 million 
  • Balance sheet total is no more than £5.1 million 
  • No more than 50 employees 

The government has produced two fact sheets 1) to explain why the changes have been introduced and 2) for Contractors to explain what to do if you are affected. 

At gHawk Accounting, we partner with tax experts and can advice on any complex tax changes. We can review your existing contract and advice whether it is caught by IR35 and what you can do to protect yourself. If this affects you, please contact us urgently

Ask gHawk: Charity Sponsorship

Charity Sponsorship

As accountants, we frequently get asked questions by business owners about different aspects of running their business.  We have started to record short videos in response to the questions so that our answers can help other business owners who might have similar questions.

If you have a question about tax, accounts or how to run your business, and you would like it answered in a future video, send your question to us with the subject Ask gHawk.

Our aim is to help business owners achieve their highest potential through strategic planning and excellent financial management.  The answers given are of a general nature and you should seek professional advice for your specific circumstances.

Today’s question is about Charity Sponsorship. Watch the video below for more information.

Transferring your VAT Registration Number

transferring your VAT number

VAT can be complex and confusing at times. Under current guidelines, you need only register for VAT if your VAT taxable turnover exceeds £85,000. You can also register voluntarily, if you wish.

VAT – Value Added Tax is a consumption tax which applies to good and services. The current VAT rate (as of 2011) is 20% – this must be added to the price of good and services where VAT applies. Supposedly, VAT only applies to ‘non-essential, luxury items’, but there are some inconsistencies, so it’s worth checking.

With services, such as plumbing, decorating or building work, you only have to pay VAT if the company is VAT registered (i.e turning over in excess of £85,000).

There may be circumstances where a VAT registration number needs to be transferred to another business. Here, we answer some common questions about the process and how to navigate it with ease.

Why would you need to transfer your VAT registration number?

You may wish to transfer a VAT registration number if you have bought a company and wish to continue using it’s VAT registration number, or likewise, if you are selling a VAT registered business. You may set up a new business and wish to transfer your VAT registration to the new one, as the old business will no longer meet the threshold. Be aware the continually transferring a VAT registration number may arouse suspicions. If you are buying a company, but you are already VAT registered, you may use your current VAT registration number.

How to do it…

The first thing to remember about VAT registration transfers is that both parties must tell HMRC of the intention.

  1. Cancel any and all direct debits connected to the VAT registration number in question.
  2. Use your VAT online account to fill out a transfer form, OR send a VAT68 form by post.
  3. Within 3 weeks, you will receive confirmation from HMRC that the transfer has been successful.

Responsibilities…

Once the VAT registration number has been successfully transferred, there are a few final steps to complete to ensure VAT compliance.

  1. The original registration holder should cancel their VAT online account’s accountant access. (Unless the new registration holder intends to use the same accountant).
  2. Any and all records relating to the previous owner’s VAT registration number should be passed over to the new owner, to compile a complete VAT history.
  3. The new owner must set up new self-billing arrangements, in order to pay their VAT correctly – in order to do this, they must register for VAT from the day they take over the business.
  4. As the new business owner, you may only claim VAT on purchases for the business once you own it. These can be reclaimed on your first VAT return.

Once you are registered for VAT, you must pay your quarterly tax return online. There are some tax benefits to paying VAT, such as claiming VAT in director’s mileage.

If you’re confused or concerned about transferring a VAT registration, paying your VAT contributions or claiming back VAT, check out the HMRC website or get in touch today.

Claiming VAT on Director’s Mileage

Claiming VAT on Director’s Mileage

Questions surrounding VAT on mileage claims are common. It can be difficult to work out and hard to ensure that you have the correct evidence to give HMRC.

Let us clear up some of the terms surrounding VAT and mileage.

What is the Advisory Fuel Rate?

As VAT is charged on fuel, HMRC allow you to claim back the VAT from the fuel portion of the mileage. To calculate this, they use their advisory fuel rate, which estimates the amount of fuel used per mile based on engine size.

HMRC asses their Advisory Fuel Rate every quarter. As of March 2019 it stands that employees using a company car can claim between 7 to 21 pence based on car engine size and type of fuel used.

You are only able to claim back VAT on ‘work miles’, i.e not ‘private use’. Private use includes travelling between work and home. Work miles might include travelling to meetings, transporting items, using the vehicle as a taxi or being a driving instructor.

There are different ways to reclaim VAT on fuel, your accountant will be able to advise you on the best way for your business.

  • Reclaim the VAT and pay the correct fuel scale charge for the vehicle (see above).
  • Only reclaim VAT on fuel used for business and ensure that you keep a detailed record of all mileage.
  • Choose not to claim VAT back if it is a very low amount and the claim does not out way the administration effort.

What is the VAT Fuel Scale Charge?

Some businesses choose to provide their staff with the added benefit of ‘free’ fuel or a fuel card. In this case staff are provided with fuel for business and personal use and, therefore, the business can claim back VAT on the fuel purchased.

However, as there is a personal use element to the fuel, HMRC requests an amount of the VAT being claimed.  The amount of VAT requested by HMRC is called the Fuel Scale Charge. HMRC sets out flat rates for this charge, which is based on the CO2 emissions of the car being used – View the full VAT Fuel Scale Charge table here.

To work out your VAT Fuel Scale charge, HMRC has produced a calculator.

  • Simply designate which tax year you are you are wanting to calculate the charge for.
  • Then select the period of time (1, 3 or 12 months of that tax year).
  • Enter the car’s CO2 emissions band (you can use this Vehicle Certification Agency index to find out the CO2 emissions band for your make and model).
  • Your VAT Fuel Scale charge will be calculated and displayed with and without VAT.

What is the VAT Flat Rate Scheme and how does it affect the VAT Fuel Scale Charge?

The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers, and the VAT the business pays on their own purchases. If a business is using the VAT Flat Rate Scheme, then no VAT is reclaimed on fuel and no scale charge is required.

  • You pay a fixed rate of VAT – therefore no estimations or advisory charges are necessary to calculate.
  • You keep the difference between what you charge your customers and pay to HMRC.
  • You can’t reclaim the VAT on your purchases.

Navigating the intricacies of claiming VAT on fuel can be very complicated. There are several hoops to jump through that become more complicated the more staff you have.

If you’re struggling to deduce the amount of VAT you could be claiming or the Fuel Scale Charges you may owe – get in touch today. We’re here to help.

Common contractor finance concerns & how to avoid them

Common contractor finance concerns & how to avoid them

If you are a contractor or are just stepping into the world of contracting – congratulations! Fluctuating income and financial concerns may be brewing, but don’t worry. Many freelancers and contractors have similar concerns and there are many ways to combat then. Ensure that you have a good accountant and be utterly compliant and protected from the start.

We’ve highlighted some of the major finance concerns contractors have voiced – and how to solve them.

Deciding between hourly and daily contract rates

When you start contracting, you’ll need to firm up your pay rates. There are two main pay rate structures: hourly rate and daily rate. Both have their pros and cons.

Daily rate is often used to give one rate for a ball pack ‘day’s work’.  A day’s work can be interpreted to be anything from 6 hours to 10 hours so be sure to have a clear contract which stipulates the expected working hours.

Beware, however, that some companies will expect a lot from one day – or those days might be excessively long. Have watertight terms of engagement before agreeing to any amount of work.

Hourly rate can be used when projects are shorter – or do not have a specific end date. Employers are usually happier with an hourly rate for lower priced services, or will agree a cap on the number of hours to be a worked a week. Hourly rate is great for ongoing retainers or project work – such as marketing, design or consulting.

Going from permanent to contracting at the same company

Whilst there are no laws against contracting to your previous employee, you may need to check your employment contract or their internal policies.

There may also be issues if your old company does not want to pay out more than it did previously, for your services. This may require some negotiation – but remember that you are now liable for paying your own tax and expenses. Take this into account.

IR35 compliance concerns

Another challenge for contractors is IR35. What is IR35? IR35 is tax legislation designed to prevent tax avoidance by workers supplying their services using an intermediary, such as a limited company, whereas the workers would be an employee if the limited company was not used.  Using an intermediary is also called ‘off payroll working’.

The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee.

IR35 means that if you choose to do that, you’ll have to pay a higher rate of tax as a ‘disguised employee’.

If you’re concerned about the tax implications of IR35, check in with your accountant for the most up to date advice.

Taking time off for holidays

During a contract, it’s unlikely that you’ll be able to take more than a week off. Any time you take as holiday will most likely be added to the end of the contract, so be aware of this when booking in future work. There are no set rules for booking holidays as a contractor. Ensure that you have discussed the potential for holiday days with the company you are working with – you may even wish to include this in your contract. Of course, if you are aware of a holiday at the conception of a project, it is a good idea to inform your client.

Negotiating pay and contracts

You may find clients try to use the cost of equivalent employees as a benchmark for what they are happy to pay contractors. This does not work as you are not an employee, you’re a specialist in one key area, your contract has defined outcomes and you get no employee benefits.

Think of the annual salary you would be aiming for and calculate the ideal day rate or hourly rate required to reach your goal. E.g. if you base your rate on working 200 days a year and you know exactly how much you’d like to take home after tax – divide that annual amount by 200 days and add 20% to cover your tax liabilities.

Pay is only one part of the contract. It is important to also think about how you will take time off for holidays, requirements for insurances, tools required for the work, flexibility of working hours, access to resources to support your work etc.

Contracting is an exciting and, at times, lucrative way to make a living. If you can cultivate a good reputation and a large portfolio, it could very well see you through to retirement. If you have financial concerns before or during your contracting, always ask your accountant for advice.



Purchases you didn’t know were tax deductible

tax deductible purchases

Let’s talk about expenses!

There are many benefits of running your own business – flexibility, uncapped earning potential, freedom and a sense of self. However, there are also great financial benefits, including claiming back your expenses and maximising your tax relief options.

Many businesses find that they are missing out on potential tax relief due to expenses they didn’t know they could claim. Things such as travel costs, corporate lunches and certain bills are tax deductible – always ask your accountant if you’re unsure.

Office supplies

Not just pens and paper, but office machinery such as printers, scanners and shredders. This also extends to the furniture used to house your office equipment. Ergonomic chairs? No problem! Laptop rest? Claimed! Anything that is used within your office can usually be claimed back as a business expense. Ensure that you keep the physical or digital receipts for your office purchases and don’t forget to give them to your accountant.

Directors phone bill

If you’re a director of a company, you can take out a business phone contract with most major providers. If you take out the contract in the company name, rather than your own, 100% of the bill can be claimed as an expense. 

Charitable donations

If you donate money, stock, shares, employee time or sponsorship payments to charity, you are able to claim tax relief. As a limited company, you may deduct the amount donated from your taxable profit, saving you money on your corporation tax. If you are an individual or sole trader, your charitable donations are tax free – as long as you keep a record of your donations. You also do not have to pay Capital Gains Tax on land, property or shares that are given to charity. Be sure to communicate all charitable efforts to your accountant to maximise on the tax benefits.

HHousehold bills

If you choose to work from home, then you cannot claim household bills as tax relief. However, if you have to work from home or have a home office for your business, there are a few things you might be able to deduct. You can claim a proportion of some of your household bills, such as telephone or internet costs. Use this free gov.uk calculator to find out how much you could claim, or ask your accountant. Or, if you haven’t got receipts to demonstrate your expenses, you can claim a flat rate of £4 per week (£208 a year) as ‘Work from home allowance’.

Subscriptions

Not gym memberships or magazines, but professional subscriptions can be claimed as an expense. This might be network memberships, training schemes, professional journals or organisation memberships. Software subscriptions such as Abode Creative Cloud, MailChimp, Canva and GSuite are all claimable subscriptions too.

Charity subscriptions, mentioned above, should not be claimed as they have their own set of rules.

Christmas Party

That’s right! If you run a team and want to treat them to a turkey dinner and some terrible dancing – you can! The expense of putting on a Christmas party counts as just that – an expenses claim (within reason):

You don’t have to pay tax on social functions and parties that are:

  • £150 or less per head
  • An annual event (such as business anniversary party, Christmas or summer barbeque)
  • Open to all employees

For more information, always consult the HMRC website.

If you’re ever in any doubt about expenses claims – it’s best to check with an expert. The penalties for incorrect tax returns are high, so don’t risk it.

Want to know more? Why not check out our specialist FREE resources on the topic:

Allowable business expenses for sole traders

Allowable business expenses for limited companies

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