We’re fast approaching the end of the tax year on 5th April, and now is usually a good time to get to grips with any tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year.
You’ll also want to stay up-to-date with the relevant tax rates and thresholds, many of which were announced in the Budget that was held on 3rd March 2021. If you're wanting a list of all the changes that will affect the self-employed and small business we've got a separate article with all the personal and business tax changes for the new tax year.
Crunch Masterclass: Get Ready For End of Tax Year 2020/21
Read on for help with getting ready for the end of the 2020/21 tax year and getting ready for the new tax year 2021/22 which starts on 6th April - or you might prefer to watch our end of tax year masterclass, which looks at everything you should be doing to maximise your tax-efficiency.
The webinar slides are available here. The questions and answers from the Masterclass webinar are available at the bottom of this article.
Make sure you take company dividends before 5th April 2021
It's vital that any dividends you wish to take from company profits are issued by your company before 5th April 2021 to be included in your personal Self Assessment with HMRC for the 2020/21 tax year. This will help maximise your tax-efficiency by fully utilising your personal tax-free allowances and HMRC tax thresholds when combined with any director salary you take.
The tax-free Dividend Allowance of £2,000 has not changed for a number of years, but the Personal Allowance and tax thresholds affect the amount of tax you’ll pay on any dividends you take. The 2021/22 and 2020/21 rates and thresholds are shown below.
Note: The dividend basic and higher rate amounts assume all of the Personal Allowance is utilised.
Speaking of income tax, you can check out our tax rates and thresholds article for more information on the income tax rates.
How much can I take in dividends for the 2020/21 tax year?
For the 2020/21 tax year, provided your only personal income before dividends is a salary of £8,788, which is the 2020/21 tax year National Insurance (NI) secondary threshold, then you can take up to £5,712 in dividends tax-free. This is calculated as follows and means your total tax-free income is £14,500 (£8,788 salary plus £5,712 in dividends).
Basic Rate threshold and tax 2020/21 tax year:
The Basic Rate tax threshold for 2020/21 is £50,000. If you have taken £14,500 in a combination of tax-free salary and dividends (see above), you can issue further dividends of £35,500 and remain within the basic rate threshold of £50,000. These dividends will be taxed at 7.5%. The total dividends issued will be £41,212 (£5,712 tax-free plus £35,500 at the basic rate of tax).
Higher Rate threshold and tax 2020/21 tax year:
The Higher Rate tax threshold is £150,000. However, when your income is above £100,000, your personal tax-free allowance is reduced by £1 for each additional £2 you earn above £100,000. Your tax-free allowance is therefore removed completely when your income is £125,000.Having issued dividends of £41,212, to reach the basic rate threshold, you can issue further dividends of £100,000 and still remain within the higher rate threshold. These dividends will be taxed at 32.5%. The total dividends issued will be £141,212.
Additional Rate of tax 2020/21 tax year
Once your total income is above £150,000 then further dividends will be taxed at 38.1%.If you have other sources of income, such as rental income or dividends from other companies, then you will reach the threshold limits more quickly and more tax may be due. Crunch clients should speak to your client managers if you’re unsure about any of this.
Make sure your records are up to date
When issuing dividends, it's important to make sure that your accounting records are up to date, so that you only issue dividends from company profits after Corporation Tax has been accounted for. For users of cloud software, such as Crunch, you need to make sure all your transactions have been uploaded from your business bank account and that you’ve reconciled your Crunch software, with all expenses, pension contributions, salaries, and sales invoices that have been issued to your clients.
Once your software, or records, are up to date you’re able to make an accurate assessment of your company profits and any Corporation Tax due. You can then calculate the dividend you can pay yourself and other shareholders. Your Crunch software will automatically show this for you.
Don’t forget that any dividends must be paid from available company profits. If you take more than is allowed, you could face penalties and interest as it’s treated as a Director Loan.
Payroll deadlines and submissions
If you’re running a regular payroll, even if it's just for you as a single director/employee, then you mustn’t forget to file your final Full Payment Submission (FPS). This is an HMRC Real Time Information (RTI) requirement and you could face a £100 fine if you don’t file your end of year Full Payroll Submission (FPS) by 5th April 2021.If you’re a Crunch client then further details on how to do this in the Crunch system can be found in our Final Payroll Submission Help Centre article.
You should record a payroll run for March 2021 to maximise your tax-efficient salary, if you have no other sources of income, this would mean paying yourself up to the NI Primary threshold of £8,788 for the 2020/21 tax year. It’s therefore worth checking the amount of salary you have been paid in the tax year to date (since 6th April 2020).
For Crunch clients, from 6th March 2021, you can record your final payroll run for the tax year. You will receive full instructions on what to do in an email from your client managers, or you can read our FPS article in the Help Centre.
Year End responsibilities for directors
With many limited companies choosing to have 31st March as their financial year end, it can be a daunting undertaking for first-time limited company directors, but with our comprehensive year end checklist you'll know exactly what you need to do.
Getting ready for the end of tax year as a sole trader
Sole traders have it slightly easier as they don’t need to worry about dividends or payroll and RTI filing (unless they have any employees). We’d still always recommend you make sure that you’ve issued all your invoices and recorded all your expenses, so that when it’s time to file your Self Assessment for the 2020/21 tax year everything is ready.
If you’re a Crunch Sole Trader Accountancy client this should be simple, and once the new tax year starts you could file your Self Assessment straight away, unless you need to wait for any paperwork for any other sources of income you may have.
Whether you’re a limited company director, or a sole trader, there are a few more things you need to think about.
Maximise your pension contributions
If you want to make pension contributions this year, you need to make sure these payments are received by your pension provider by 5th April 2021.
If you run a limited company then making payments through your limited company is usually more tax-efficient. You can also pay into your pension through your monthly payroll or make lump sum contributions periodically throughout the tax year.As a sole trader you just need to pay directly to your pension provider.
The total amount that can be contributed per year and still be tax-free is £40,000. Up to that limit, the government provides tax relief at the basic rate of 20% and this is added to your contributions by your pension provider.
If you are a higher rate taxpayer, you can claim further tax relief through your annual Self Assessment return. You are allowed to include the full £40,000 amount on your Self Assessment and the government will provide further tax relief of 20% (if you pay tax at the higher rate of 40%). So you claim back £8,000 from the government through your annual Self Assessment.
Don’t miss out on Pension Tax relief
If you’re a higher rate taxpayer, and you make contributions personally, your pension pot can be topped up by £1,000 and it would cost you £600 after tax relief. As a basic rate taxpayer, your pension pot can be topped by £1,000 and it costs you £800.
Don’t forget your annual ISA allowance
While you’re thinking of future investments, you may want to check if you could make any payments into an ISA or other tax-efficient savings which also have limits on what you can pay in each tax year.
Please speak to your financial advisor for more information and bespoke advice. If you don’t have an advisor then we can help. Find out more about Investments and Pensions advice from our partner Hargreaves Lansdown.
What changes will there be from 6th April 2021?
The government is introducing some important changes to the rules surrounding IR35 in the private sector that could affect contractors working through their own limited company. These, and other changes, will be introduced from 6th April 2021, as shown in the following updates:
- New rules for IR35 in the private sector
- VAT reverse charge in the construction industry (from 1st March 2021)
- National Insurance contribution threshold changes
- UK Income tax allowance and threshold changes
- Scottish income tax thresholds changed
- Changes to Student Loan deductions thresholds
We’ve put together an article with all the new tax year changes that impact the self-employed and small businesses. We also have an article with highlights from the 3rd March 2021 Budget.
End of Tax Year 2020/21 Q&A Session
On 10th March 2021, we held an End of Tax Year and Budget update webinar to help both new and existing Crunch members learn how to prepare for the end of tax year and what impact any Budget 2021 announcements would have on their businesses.
You can view a recording from the session at the top of this page or download the slides from the session.
We also received a number of questions during these sessions, so we’ve documented them here for you.
Q: Do my expense receipts need to be uploaded into Crunch, or is just the record of the expense ok? They’re all low value. Ideally yes, but if they are very low value then…
A: Ideally yes, but if they are very low value then you could group them together and take images to save in a folder just in case you need them at a later date.
Q: Is rental income from a house abroad included as an income for taxes?
A: This depends – if you’re a UK Tax resident (as is the case for most of our Crunch clients) then you will be taxed in the UK on your worldwide total income from all sources. You will need to take account of this income (and any other income from other sources) when deciding on the amount of salary and dividends you take from your company. You should speak to your client manager for individual advice.
If you’re not a UK tax resident, you will need to take specialist tax advice based on your country of residence.
Q: Does a dividend have to actually be paid to a director within the tax year, I thought you could pay it later and back-date it?
A: We always recommend that you issue the dividend from your limited company before the end of the tax year that you want to pay any personal Income Tax due. Dividends are paid from company profits after Corporation Tax is accounted for. The personal tax due is calculated in your annual Self Assessment tax return. So, you should try to ensure that the dividend is recorded within the relevant tax year. You don’t have to actually take the funds from your limited company if you don’t wish to do so – it would simply be a positive balance in your Director’s Loan Account.
HMRC do not look kindly on backdating dividends after the end of the tax year.
Q: So it’s OK to issue dividends in one tax year but do you have to take the money from the bank account, or can the company owe you?
A: It’s important to issue the dividends from your company in the correct tax year, so that it’s reported on the relevant Self Assessment. But you can always issue a dividend, but leave the money in the company. This would be a positive balance on your Director Loan Account as mentioned above which means the company owes you money.
Q: Do you need to pay yourself dividends from your company by the end of the company tax year, not your personal tax year?
A: As mentioned above, dividends are paid from company profits after accounting for Corporation Tax. You may need to pay Income Tax on dividend income in your personal tax return. So we recommend you issue any dividends from your limited company that you want included in your 2020/21 Self Assessment by the 5th April 2021.
You won’t actually need to file your 2020/21 Self Assessment and pay any tax due until the deadline which will be the 31st January 2022, though you can always choose to file early so you know how much tax you’ll need to pay! You can file your Self Assessment as soon as your P60 and P11D are ready.
Q: What are your average fees for Self Assessment for an account manager for sole traders ?
A: Our Sole Trader Pro package includes Self Assessment preparation and filing for just £24.50+VAT per month, which includes one Self Assessment every 12 months. If you need to have a previous years Self Assessment done, from before the time you were using Crunch, we can help as long as you’re on one of our complete accountancy packages. The price depends on the complexity (i.e. if you have multiple sources of income etc, and whether or not the Self Assessment is overdue).
Q: Are there any major benefits to taking a salary slightly above the secondary threshold, but below the primary threshold? Especially in terms of NIC contributions and state pension.
A: We don’t normally recommend this. This is because there are a number of National Insurance thresholds. In terms of the state pension and getting a ‘qualifying year’ the important threshold is to have a salary above the Lower Earnings Limit (£6,240 in the 2020/21 and 2021/22 tax years – view all the current tax rates) to ensure you accrue qualifying years towards your state pension.
The National Insurance (NI) thresholds to be aware of are all currently lower than the Personal Allowance and are important when setting your salary:
- The Lower Earnings Limit – as long as your salary is set above this level, you’ll retain your State Pension contribution record
- The National Insurance (NI) Primary threshold – as long as your salary is below this level, you won’t need to pay any employee’s NICs
- The National Insurance (NI) Secondary threshold – as long as your salary is below this level, your limited company won’t need to pay any employer’s NICs
So, the aim is to set your salary at a level that is above the Lower Earnings Limit to obtain the benefits of qualifying for the state pension but below the level where you’ll need to pay either employee or employer’s NI. Win, win!
Full details are in our article “How much should I take as a salary from my limited company?”
Q: Does IR35 apply to clients I have outside the UK (for instance, in the US)?
A: As long as the end-client does not have any UK presence, then they will not be expected to decide the IR35 status of your assignment, it will remain your responsibility as the director of your limited company. You can use our free IR35 calculator to check the IR35 status of any of your assignments.
Q: Quick question about claiming expenses (sorry if I should have asked earlier!). Why is it important to claim expenses before the end of the tax year when they affect corporation tax (that runs to the company financial year)?
A: For Sole Traders, it’s important to claim expenses in the correct tax year to ensure you pay the right amount of tax.
For limited companies too, although the expenses reduce your Corporation Tax bill rather than your Self Assessment Income Tax Bill, it’s important to have an up to date picture of your company profits so you know what dividends you have available to take before the end of the tax year.
Q: Using Sole Trader Crunch Free – how can I record expenses for my own training, please?
A: As long as the training is for something related to your business, such as a course in design software for a creative freelancer then it is an allowable expense. If you’re a limited company director, record it as staff training. If you’re a sole trader, record it as Direct costs (other), you could leave a note explaining the expense in your Crunch software too if you wish. We’re currently enhancing the expense types for our Crunch sole trader software and training will be added as an expense type shortly.
Q: Hi! “assuming no other source of income” for recommended £8,840 director salary in the 2021/22 tax year – if I have a rental income that’s less than £7,500/year (which is allowed in the “rent a room” scheme”) does this mean that I can still aim to pay myself as the sole director of my limited company £8,840 with no tax or NI due? Thanks!
A: If you receive income from renting out a room in your house (provided you’re resident in the house) then you have an additional £7,500 allowance under the Rent a Room Scheme. This lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else. So, you would still be able to pay yourself a director salary of £8,840 in the 2021/22 tax year with no Income Tax or National Insurance to pay. Further details on Rent a Room are on the Gov.uk site.
Q: Pension contributions: whilst it’s possible to make pension contributions of up to £40,000 per tax year, is it possible to pay pension contribution of £80,000 in a COMPANY YEAR (e.g. company year end is in Feb, then a £40,000 pension contribution for March, and another £40,000 contribution in August?
A: If you have the profits in your limited company, then this would be possible yes. The Pension Annual allowance runs from 6th April to 5th April, covering a tax year. In your example, this would let you pay up to £80,000 within your company tax year. It’s worth saying that the amount that you pay must not exceed your company’s income for the year as this could raise questions from HM Revenue and Customs as to whether the amount has actually come from your company’s trading.
You may also be interested to look into Pension Carry Forward which enables you to take advantage of any unused pension allowance from the previous three tax years.
More information is available on our “Make pension contributions from my limited company” article.
Q: Question on IR35 – if I have a contract that’s inside IR35, and as a result need to go under an umbrella company – what should I do with my LTD in the meantime?
A: You have a number of choices depending on your situation. If you work on multiple contracts, some inside IR35 and some outside IR35, then our Ltd Company Premium package includes the ability to switch seamlessly between ‘Outside IR35’ assignments through your limited company and ‘Inside IR35’ assignments through a limited company.
If you’ll only be working on a single assignment within IR35, then if it’s short term you may wish to make your limited company dormant and work through an Umbrella company. We can also help with this.
We recommend you speak to your client managers for individual advice on what’s best for you. Our article on getting ready for IR35 has more information.
Q: I have a contract with a company based outside the UK. My understanding of this case is, you are still subject to IR35, and it is my limited company’s responsibility to decide if this contract is under IR35 or not, but in the session, one slide says it seems IR35 is not for such a contract with an overseas company? Is my understanding correct?
A: If you have an assignment with a company based entirely outside the UK, then it remains the responsibility of your limited company to decide if the assignment is inside or outside IR35. The slide says that the new rules for the private sector do not apply which is correct. In this case, the old rules for the private sector still apply and your company must make the IR35 status assessment. Apologies if this wasn’t clear.
Q: If I use my limited company as a second income to my regular jobs, should my salary be less than £8,788 (or £8,840 for next year)?
A: Each employment has its own National Insurance allowance so it may still be tax-efficient to pay up to the relevant National Insurance threshold. However, depending on the other income you have you may need to pay Income Tax on this salary and you may have a non-standard tax code. Please speak with your client managers for individual advice on your situation.
Need some more help?
All of the above comments are for your information only. We always recommend speaking to an accountant for a more in-depth analysis of your circumstances. If you don't have an accountant or are looking to switch, give our friendly Crunch team a call on 0333 311 8000 or arrange a free consultation.
We have a great range of accountancy packages that come with all the support and advice you need to make keeping on top of your finances a breeze.