Jet Accountancy

A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.

Preserving pension entitlement

One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.

For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.

Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.

Optimal salary – Employment allowance is not available

The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.

For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month).

Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 – £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.

Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.

Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).

Optimal salary – Employment allowance is available

In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%.

Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).

The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.

Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.

Fourth grant

The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.

To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.

To qualify for the grant, the trader must either:

• be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
• have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.

The trader must also declare that:

• they intend to continue trading; and
• they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.

Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.

Fifth grant

The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.

Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.

Newly self-employed

When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.

Grants are taxable

Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.

The Chancellor, Rishi Sunak, presented his 2021 Budget on 3 March 2021. The following are some of the key announcements.

Coronavirus Job Retention Scheme to run until September

The Coronavirus Job Retention Scheme is extended until the end of September 2021. The UK government will continue to pay 80% of employees’ usual wages for the hours not worked, up to a cap of £2,500 per month, up to the end of June 2021 For periods in July, CJRS grants will cover 70% of employees’ usual wages for the hours not worked, up to a cap of £2,187.50. In August and September, this will then reduce to 60% of employees’ usual wage up to a cap of £1,875.

Further grants under the Self-Employment Income Support Scheme

The self-employed will also be able to claim two further grants under the Self-Employment Income Support Scheme. The fourth grant will cover February to April 2021 and be worth 80% of three months’ average profits, capped at £7,500. The final grant will cover May to September and will depend on the impact that the pandemic has had on turnover. The final two grants will be available to those who started their self-employment in 2019/20, as long as they filed their 2019/20 tax return by midnight on 2 March 2021.

SSP rebate scheme to continue

The SSP rebate scheme which allows smaller employers to reclaim up to two weeks’ SSP  per employee from the Government for coronavirus-related absences is to continue for the time being. 

Income tax thresholds frozen

For 2021/22, the personal allowance will rise to £12,570. The basic rate band remains at £37,700, meaning that higher rate tax becomes payable for someone in receipt of the standard personal allowance once income exceeds £50,270. Income tax rates are unchanged for 2021/22, at 20%, 40% and 45%, as are the dividend tax rates, which remain at 7.5%, 32.5% and 38.1%.

The personal allowance and higher rate threshold will remain at their 2021/22 level until April 2026.

IHT nil rate band frozen

The inheritance tax nil rate band will remain at its current level of £325,000. The residence nil rate band, available where the main residence is left to a direct descendant, will also remain at its current level of £175,000 until April 2026.

No change to capital gains tax annual exempt amount

The capital gains tax annual exempt amount is unchanged at £12,300 for 2021/22. It will remain at this level to the next five years, up to an including 2025/26.

Pension lifetime allowance unchanged

The pension lifetime allowance, which places a cap on tax relieved pension savings will remain at its current level of £1,073,100 until April 2026. This will impact on individuals with pension savings at or near this level, limiting future tax-relieved pension savings.

Super-deduction for capital expenditure

Companies will be able to benefit from enhanced capital allowances for investment in plant and machinery where the expenditure is incurred between 1 April 2021 and 31 March 2023. A first-year allowance of 130% will be available for expenditure on plant and machinery that qualifies for main rate capital allowances of 18%, while expenditure on plant and machinery qualifying for special rate capital allowances of 6% will qualify for a 50% first-year allowance. This is independent of the Annual Investment Allowance, which can be claimed instead where this is more beneficial.

Carry-back period for losses temporarily increased

Unincorporated business and companies can benefit from a temporary extension in the period for which losses can be carried back. The carry-back period is increased from one year to three years for a limited period. For unincorporated businesses, the extended carry back will apply to losses incurred in 2020/21 and 2021/22. For companies, it will apply to losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and 1 April 2021 and 31 March 2022 (subject to a cap of £2m for each accounting period).

Relief is given against profits of a later year before those of an earlier year.

Taking advantage of the measure to carry back losses incurred as a result of the Covid-19 pandemic may generate a much needed tax repayment.

Future rises in corporation tax

The rate of Corporation Tax will increase from April 2023 to 25% on profits over £250,000. A small companies’ rate of 19% will apply to companies with profits or £50,000 or less. Companies with profits of between £50,000 and £250,000 will pay corporation tax at the main rate of 25%, but will benefit from marginal relief. The limits will be reduced to take account of the number of associated companies and for accounting periods of less than 12 months.

Tax exemption for Covid-19 antigen tests

An income tax exemption is to be introduced to apply retrospectively for 2020/21 where an employer reimburses an employee for the cost of a coronavirus antigen test. The exemption will also apply for 2021/22.

The exemptions will also apply for National Insurance purposes.

Temporary SDLT threshold extended

The temporary increase in the Stamp Duty Land Tax (SDLT) residential threshold to £500,000, which was due to come to an end on 31 March 2021, has been extended and will remain in place until 30 June 2021. From 1 July 2021 the threshold will be reduced to £250,000, returning to its usual level of £125,000 from 1 October 2021.

SDLT applies to property purchases in England and Northern Ireland only; Land and Buildings Transaction Tax (LBTT) is payable in Scotland and Land Transaction Tax (LTT) is payable in Wales.

VAT registration threshold remains at £85,000

The VAT registration threshold will remain at its current level of £85,000 for 2021/22 and for the following two years.

Temporary 5% VAT rate for hospitality and leisure extended

The temporary 5% rate of VAT for hospitality, holiday accommodation and leisure attractions will remain in place until 30 September 2021. From 1 October 2021 until 31 March 2022 a new reduced rate of 12.5% will apply, before reverting to the standard rate of 20% from 1 October 2022.