For the 2020/2021 tax year, tax allowances and rate bands have, in the main, remained the same. In this article, we demonstrate what that means to freelancers and contractors in real terms, and offer our advice for trading as tax-efficiently as possible.
Use the optimum salary levels for 2020/21.
There are two main scenarios for salary levels. In the majority of cases, the salary level should be:
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 remained the same at £50,000. This means you can have total income of £50,000 before you pay higher rate.
The optimum amount of dividends for most people in each tax year will be:
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 freelancers and contractors 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.
You have a few options with this:
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:
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:
Due 31 July 2021 – £1,000 made up as:
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:
The payroll summary will be emailed at the start of the new tax year in April 2020.
As freelancer specialists, we class as ourselves as experts in handling freelancer accounts.
You can find out more about our services here, or, speak to one of our directors on 01962 790237.