What are the new tax bands for the tax year 2020/21?
There have been several updates in the tax rates for the tax year April 6th 2020 to April 5th 2021, these changes affect the tax rates for England & Wales and the tax rates for Scotland. The tax-free allowance remains unchanged at £12500 per year.
In England and Wales, the tax bands are as follows
£0 to £12500 – Tax free
£12501 to £50000 – taxed at the basic rate of 20%
£50001 to £150000 – taxed at the higher rate of 40%
£150001 and over – taxed at the additional rate of 45%
In Scotland the tax bands are as follows
£0 to £12500 – Tax free
£12501 to £14585 – at the starter rate of tax of 19%
£14586 to £25158 – at the basic rate of tax of 20%
£25159 to £43430 – at the intermediate rate of tax of 21%
£43431 to £150000 – at the higher rate of tax of 41%
£150001 and above at the top rate of tax of 46%
There are been changes to the rates of National Insurance and Employers National Insurance.
The tax-free amount for employees has been increased to £9500 however the tax-free amount for employer national insurance is £8788. The bands are shown below.
Employee National Insurance
£0 to 9500 – tax free
£9501 to £50000 – taxed at 12%
£50000 and above taxed at 2%
Employer National Insurance
£0 to £8788 – tax free
£8789 to £50000 – taxed at £13.80%
£50001 and over taxed at £13.80%
The taxes on dividends have remained the same for the 2020/21 tax year dividends will be taxed as below.
£0 to £2000 will be tax free
£2000 to the higher rate tax band will be taxed at 7.5%
Dividends from the higher tax rate to the top or additional rate will be taxed at 32.5%
Dividends above additional rate or top rate of tax will be taxed at 38.1%
The strategies you can take are listed below in order of tax efficiency if you are a limited company director.
You can pay yourself the amount equal to the Employee National Insurance Threshold of £9500
You can pay salary equal to the Employer National Insurance Threshold of £8788
You can pay yourself salary amount equal to the Tax-Free personal allowance of £12500. This amount may preferable if you have a few employees working for your company and can claim the employment allowance.
You can pay an amount of your choosing not listed above.
It is important that you decide which option you want to choose and communicate that to your accountant so they can process your salary.