Starting up in business is a big step for anyone to take, but now could be the right time for you to make the jump!
Tax code changes. The personal allowance has increased. For 2019/20, it will rise by £650 to £12,500 from 6 April 2019. Unless you receive an amended tax code notification, all “L” suffix codes will need to increase by 65 for 2019/20, e.g. code 1185L becomes 1250L.
NI changes. The employment allowance (relieving employers of the first £3,000 employers’ NI) is still available for 2019/20 to all employers. From 5 April 2020, it will be restricted to employers with an employers’ NI liability below £100,000 in the prior year. The NI thresholds have increased, both employees’ and employers’ Class 1 NI, will be due on earnings over £166 per week (£8,632 a year). For employees under 21, use the NI category letter M instead of A. Although they still have to pay employees’ NI on earnings over £162 per week, your company won’t have to pay 13.8% employers’ NI on earnings between £166 and £962 per week. This also applies to apprentices under 25 when the NI code you should use is H.
Optimum director shareholder salaries and dividends. If the directors in your company are also shareholders and receive remuneration in the form of a minimum salary and dividends, then their optimum salary/dividend package in 2019/20 depends on the following. Assuming: a) they don’t have an employment contract so the national minimum wage doesn’t apply; b) your annual employers’ NI bill is already more than £3,000, so the employment allowance will have been fully utilised; and c) they have not yet accrued maximum entitlement to the state pension, then go up to the NI threshold but no higher. For 2019/20, this would be a monthly gross salary of £719 taking them up to the NI threshold.
Regarding dividends, if the director-shareholders want to go up to the basic rate limit (£37,500 for 2019/20) but no further, assuming they have no other income, they can receive dividends of £41,372 for the tax year (£3,447 a month) on which they’ll have to pay personal tax of £2,662.50 by 31 January 2021.