The UK tax system is quite complex. It has a wide variety of tax brackets, allowances, and tax relief plans that affect how individuals and businesses are taxed.
To help you with your tax, we explain the 2020/21 tax rates and thresholds and their effects on your business finances.
National Insurance rates for 2020/21
National insurance or NI, as it is called in the business world, includes different categories of insurance differ depending on whether it is an employee, employer or self-employed. For each category, there are also several thresholds.
Employees pay Class 1 National Insurance. Employees who are eligible have deducted the NI contribution amount from their wages by their employer, who then pays HMRC on their behalf. There are 3 thresholds for this "employee" category :
- Lower Earnings Limit (LEL) : The weekly threshold 2020/21 is set at £120 (£6,240 for the annual one). Employees who earn less than these amounts will not incur NI, but will not receive NI benefits, such as payments eligible for their state pension.
- Primary Threshold : The weekly threshold 2020/21 is set at £183 (£9,500 for the annual threshold). It is from this income threshold that employees start to pay NI. If the amount of income is between the two thresholds, the employee still does not incur NI, but he will earn NI "credits" and accumulate NI benefits.
- Upper Earnings Limit is fixed at £962 per week and £50 000 per year. Earnings above the Primary Threshold and below the Upper Earnings Limit are taxed at 12% while earnings above the Upper Earnings Limit are taxed at 2%.
Employers pay NICs at a rate of 13.8% on salary payments above £169 per week and £8788 per year.
Eligible employers, who have at least 1 employee or 2 directors on the payroll can claim up to £4,000 relief to cover the costs of employers National Insurance, by claiming the Employment Allowance.
Self-employed people pay Class 2 and/or Class 4 National Insurance, depending on how much they earn from their self-employed work.
How much tax will be paid on dividends in 2020/21?
If you are a director of a public limited company, the most tax-efficient remuneration generally consists of combining a salary and dividends.
Dividend payments are subject to tax but not to national insurance.
You will not pay any tax on dividend income that comes under your personal allowance. On the other hand, if you earn more than the Personal Allowance, there is a non-taxable allowance for dividend payments, called the dividend allowance.
Dividend payout for 2020/21 is £ 2,000.
So, for example, this means that you could earn a salary of £ 12,500, plus a dividend of £ 1,500, without paying tax but only NI on part of the salary.
You will pay tax on dividends earned on your dividend allowance. This is why it is important to deduct your allowance. Your tax bracket is established by adding your total dividend income to your other income. It is possible to pay taxes at several rates.
Here are the 3 levels of dividend taxe :
- Basic-rate taxpayers earn from £ 12,5001 to £ 50,000. They will pay 7,5% on dividends earned above dividend allowance.
- Higher-rate taxpayers earn from £50,001 to £150,000 will pay 32.5% on dividends earned above dividend allowance.
- Additional-rate taxpayers earn more than £150,000. They will pay 38.1% on dividends earned above dividend allowance.
How much are Corporation Tax and VAT in 2020/21?
Corporation Tax for 2020/21 is 19% of the profits made.
If your revenue reaches the VAT registration threshold of £85,000 then you must register for VAT, which rates haven’t change. The only novelty is on December the 1st of 2020 e-books, online newspapers, magazines, and journals will no longer be subject to VAT.
To optimize your taxation, do not hesitate to expose your forecast balance sheet to your accountant.