What are the new tax bands for the tax year 2020/21?

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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.

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