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Profit extraction in 2020/21 – What is the optimal salary?

Adrian Mooy - Monday, April 20, 2020
A popular tax-efficient profit extraction strategy used by personal and family companies is to take a small salary and extract further profits as dividends.
Where this approach is adopted, the starting point is to determine the optimal salary. While this will depend on personal circumstances and there is no excuse for not doing the sums, there are some general guidelines.


Where the director does not have the requisite 35 qualifying years to provide access to the full single tier state pension paying a salary at least equal to the lower earnings limit for Class 1 National Insurance purposes (set at £120 per week; £520 per month and £6,240 per year) will ensure that the year is a qualifying one.


Maximum salary that can be paid free of tax and National Insurance


The first question to consider is what is the maximum salary that can be paid free of income tax and employer’s and employee’s National Insurance. For 2020/21, the key numbers are:


 • the personal allowance – set at £12,500;


 • the primary threshold – set at £9,500 per year; and


 • the secondary threshold –set at £8,788 per year.


Assuming the personal allowance has not been used elsewhere, the maximum salary that can be paid without triggering a tax or National Insurance liability is one equal to the secondary threshold of £8,788.


However, if the director is under 21, there is no secondary Class 1 liability until earnings exceed £50,000 and in this scenario, the maximum salary that can be paid free of tax and National Insurance is one equal to the primary threshold of £9,500 per month. The same is true where the director is over 21 but the employment allowance extinguishes any secondary Class 1 liability.


Is a higher salary tax-efficient?


Salary payments and any associated employer’s Class 1 National Insurance contributions are deductible for corporation tax purposes and there will therefore be an associated 19% reduction in the corporation tax bill. Where paying a higher salary triggers a National Insurance liability, this will be worth paying if it is more than offset by the corporation tax reduction. The sums differ depending on whether the employment allowance is available.


Employment allowance unavailable


In a personal company scenario, it is unlikely that the employment allowance is available as companies where the sole employee is also a director, as would be usual in a personal company do not qualify.


Where this is the case, assuming the director is over 21, a salary in excess of £8,744 will attract a secondary Class1 National Insurance liability. However, there is no primary Class 1 liability until the salary reaches the higher primary threshold, set at £9,500 for 2020/21. At 13.8%, the rate of employer’s National Insurance is less than the corporation tax rate – the corporation tax saving on the salary and employer’s National Insurance of £163 (19% (£756 x 1.138)) is more than the employer’s National Insurance on the additional salary of £104 (13.8% of £756), meaning it is tax efficient to pay a salary of £9,500. However, the employer’s NIC will need to be paid over to HMRC, incurring admin costs.


However, beyond this level, the combined effect of employer’s and employee’s National Insurance outweighs any corporation tax saving. The optimal salary in this case is therefore £9,500 a year.


Employment allowance available


In a family company scenario, the employment allowance may be available, making it possible to pay a salary of £9,500 free of tax and National Insurance. Paying an additional £3,000 to bring the salary up to the level of the personal allowance will trigger an employee Class 1 liability of £360 (12% of £3,000). However, the additional salary of £3,000 will reduce the corporation tax bill by £570 (19% of £3,000), making the additional salary worthwhile. However, once income tax at 20% is brought into the mix, this is no longer the case, meaning the optimal salary is one equal to the personal allowance of £12,500.
Switch to dividends


Once the optimal salary has been paid, it is tax efficient to extract further profits as dividends.


Claiming the National Insurance employment allowance for 2020/21

Adrian Mooy - Thursday, April 16, 2020
The National Insurance employment allowance is available to eligible employers and can be set against the employer’s secondary Class 1 National Insurance liability. In the 2020 Budget, the Chancellor announced that the allowance would be increased to £4,000 for 2020/21. However, from 6 April 2020, it is only available to employers whose Class 1 National Insurance liability in the previous tax year was less than £100,000. Existing exclusions continue to apply, including that for companies where the sole employee is also a director -- meaning that personal companies rarely qualify.
If an employer has more than one PAYE scheme, the employment allowance can only be claimed in respect of one of the PAYE schemes.
Maximum amount of the allowance
For 2020/21, the National Insurance employment allowance is the lower of:
 • the employer’s secondary Class 1 National Insurance liability for the year; and
 • £4,000.
Thus, where the secondary Class 1 National Insurance liability for the year is more than £4,000, the employment allowance is £4,000. It is set against the employer’s Class 1 National Insurance liability until it is used up. It cannot be set against Class 1A (payable on benefits in kind) or Class 1B (payable on items within a PAYE settlement agreement) liabilities – only secondary Class 1.
Remember to claim
The National Insurance employment allowance is not given automatically and must be claimed. A claim can be made through the employer’s payroll software; the claim is made in the Employment Payment summary by putting a ‘Yes’ in the Employment Allowance indicator field. It only needs to be claimed once for the tax year – once claimed it is available until the allowance has been used up. Any unused balance is carried forward to the next tax month.
The claim can be made at any time in the tax year, but it is advantageous to make the claim as soon as possible. If a claim is made too late to enable it to be fully offset against the employer’s secondary Class 1 National Insurance liability, the employer can either ask HMRC for a refund, providing that they do not owe anything to HMRC. Alternatively, the unused amount can be set against other tax bills which the employer has to pay – including VAT and corporation tax.
Employers eligible for the employment allowance should not only remember to claim it for 2020/21 – they should also check that they utilised the allowance in full in 2019/20.


Coronavirus self-employed scheme

Adrian Mooy - Friday, April 10, 2020
HMRC will pay a taxable grant to self-employed individuals and partners equivalent to 80% of their average trading profits for three months, capped at £2,500 per month.


Who gets what? - The government has chosen to base the amount of grant for each taxpayer on the average of their trading profits as reported in their last three tax returns for the years: 2015/16 to 2018/19. If the taxpayer started trading within this three year period the monthly average of profits will be calculated from the periods in which they were trading.


The taxpayer (or their tax agent) does not need to provide any figures at this stage. HMRC will arrive at the taxpayer’s average earnings by totalling up the reported profit for the three tax years (or shorter period as applicable) and divide by three to arrive at a typical average year. One quarter of that average annual profit will then form the basis of the SEISS grant awarded – at the 80% rate.


The number of months covered by a SEISS grant may be extended beyond three months if the coronavirus shutdown continues beyond the end of June.
Who doesn’t qualify - The SEISS grant will not be payable to anyone who meets any of these conditions:
 - has average annual profits of £50,000 or more – those taxpayers will get nothing
 - has not submitted a tax return for 2018/19
 - receive less than half of their annual taxable income from self-employed profits
 - has already ceased trading permanently.
If the taxpayer has not submitted their 2018/19 tax return, they have until 23 April 2020 to submit it in order to qualify for the grant. Penalties for late filing and late payment of tax will apply as normal.


Those who started trading on or after 6 April 2019 are not eligible for the SEISS grant. This seems harsh, but HMRC has to draw the line somewhere.
The purpose of the SEISS grant is to help traders through the coronavirus crisis. To qualify for the grant the business must have traded in 2019/20 and would still be trading if it hadn’t been for the interruption to business due to the coronavirus. If the trader has taken the decision to cease trading completely, no grant is payable.


Property letting businesses are not regarded as a trade, so landlords will not qualify for the SEISS grant even if more than half of their taxable income is from rental income.


Similarly, the letting of furnished holiday accommodation is not strictly a trade, although it is treated as a trade for certain pensions and CGT purposes. HMRC are unlikely to consider income from furnished holiday lets as qualifying for the SEISS grant, although these landlords will be among the hardest hit of all “self-employed”.


How will the grant be delivered? - HMRC will contact those taxpayers who are eligible for this grant and will invite them to apply for the payment online. It is not clear if this contact will be made by letter, but it certainly won't be by email or text message.


The taxpayer may need to confirm to HMRC that they were trading in 2019/20 and expect to continue to trade in 2020/21. Some indication of the business turnover for 2019/20 may have to be provided at that point.


When will the money arrive? - The SEISS grant for three months will be payable in one lump sum into the taxpayer’s bank account, but the money will not be available until early June.


The grant will be treated as taxable income, and will have to be reported on tax returns for 2020/21. Taxpayers in receipt of working tax credits or universal credit will have to treat the SEISS grant as part of their self-employed income for 2020/21.


Making tax-free payment to employees working from home

Adrian Mooy - Thursday, April 09, 2020
As a result of the Coronavirus (COVID-19) pandemic, many workers have been forced to work from home. While working from home saves the costs of commuting to the workplace and perhaps allows workers to adopt a more relaxed dress code, there are also costs associated with working at home. Workers may need to equip themselves with somewhere to work, and perhaps invest in furniture, equipment and stationery where this is not provided by the employer. Household bills are also likely to increase as a result of homeworking arrangements.


There are also tax implications to consider, both where the employer meets the additional costs and provides equipment etc., and also where the employee picks up the tab.


Additional household expenses


Household expenses may increase where an employee works from home – the costs of heating and lighting may rise, as may telephone, broadband and cleaning costs. The tax system recognises this and include an exemption that allows employers to reimburse tax-free reasonable additional household expenses incurred as a result of working from home. Household expenses are defined as ‘expenses connected with the day-to-day running of the employee’s home’. For the exemption to apply, the employee must be working at home under ‘homeworking arrangements’. These are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of employment at home.


The costs that can be reimbursed within the scope of the exemption include the additional costs of heating and lighting the work area and increased charges for internet use, home insurance or business telephone calls. Where working at home triggers a liability for business rates, the extra cost that this entails can be met within the terms of the exemption.


The exemption does not apply to fixed costs which are the same regardless of whether the employee works at home or not, such as rent or mortgage interest. Likewise, expenses that put the employee in a position to work at home, such as the costs of setting up a home office, are not covered
As regards the amount that can be reimbursed tax-free, the employer can meet the actual additional costs of working at home. However, these are likely to be difficult and time consuming to identify, and the effort is likely to be disproportionate to the amounts involved. Far simpler is to take advantage of the flat rate allowance which enables employers to pay homeworking employees £6 per week tax free to cover additional household expenses. Prior to 6 April 2020, the tax-free amount was £4 per week. On the downside, the amounts are not exactly generous and may not cover the additional costs in full.
However, where an employer does not meet the cost of additional household expenses, the employee can only deduct expenses to the extent that they are wholly necessarily and exclusively incurred in performing the duties of the employment. There is no corresponding flat rate deduction for employees.
Equipment and supplies


A separate exemption removes any charge to tax where the employer provides the employee with ‘accommodation, supplies or services’ used by the employee in performing the duties of the employment. In a homeworking context, this may cover the cost of providing a computer and a printer, stationery and maybe a desk and chair. Private use does not jeopardise the availability of the exemption as long as it is not significant.
Again, relief is only available to the employee for revenue costs that are wholly, exclusively and necessarily incurred – stationery costs may come into the category. There is no relief for capital expenditure met by the employee in order to facilitate working from home.


Cars and vans – What’s new for 2020/21

Adrian Mooy - Monday, April 06, 2020
There are a number of changes that apply from the start of the 2020/21 tax year that relate to the taxation of company cars and vans.


New way of measuring CO2 emissions


The way in which the level of a car’s CO2 emissions is determined changes from 6 April 2020. The CO2 emissions figure for new cars registered on or after that date is determined in accordance with the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). The CO2 emissions figure for cars registered before 6 April 2020 is determined in accordance with the New European Driving Cycle.


Different appropriate percentages


For 2020/21, it will be necessary to know whether a new car was registered before 6 April 2020 or on or after that date in order to ascertain the correct appropriate percentage to use when calculating the company car benefit charge.


With the exception of zero emission cars and those with CO2 emissions of 170g/km and above, for 2020/21, the appropriate percentage for cars registered on or after 6 April 2020 whose CO2 emissions are determined in accordance with the WLTP is two percentage point lower than for a car with the same CO2 figure which was registered prior to 6 April 2020 and whose emissions are determined in accordance with the NEDC. This means, for example, that the appropriate percentage for a car with CO2 emissions of 100—104g/km is 23% where the car is registered on or after 6 April 2020 and 25% where the car is registered before that date. The maximum charge applies for cars registered prior to 6 April 2020 with CO2 emissions of 160g/km and over and to cars registered on or after 6 April 2020 with CO2 emissions of 170g/km and over. The 4% diesel supplement applies where diesel cars do not meet RDE2 standards, subject to the 37% maximum charge.


For 2021/22, the appropriate percentage for cars registered on or after 6 April 2020 will be one percentage point lower than those registered prior to that date. The figures are aligned from 2022/23.


Zero emission cars


The charge for zero emission cars is 0% for 2020/21, regardless of whether the car was registered before or after 6 April 2020. It will increase to 1% for 2021/22 and to 2% for 2022/23.


Cars in 1—50g/km


The appropriate percentage for cars in the 1—50g/km band also depends on the car’s electric range for 2020/21 onwards. This is the case regardless of whether the emissions are measured under the WLTP or the NEDC.


The 1—50g/km is split into five bands according to the car’s electric range (also referred to as its zero emission mileage). The bands are:


 • more than 130 miles;
 • 70 to 129 miles;
 • 40 to 69 miles;
 • 30 to 39 miles; and
 • less than 30 miles.


The appropriate percentages range from 2% to 14% for cars registered before 6 April 2020 and from 0% to 12% for cars registered on or after this date, with lower percentages applying to cars with the greatest electric range.


Car fuel benefit


Where an employer provides, or meets the cost, of fuel for private motoring in a company car, a benefit in kind charge arises, found by multiplying the appropriate percentage by the multiplier for the year. For 2020/21, the car fuel multiplier is set at £24,500.




The flat rate van benefit in kind is set at £3,490 for 2020/21. The charge for zero emission vans is 80% of the full charge, equivalent to £2,792. The fuel benefit charge where fuel is provided for private motoring in a company van is set at £666 for 2020/21.


The charge for zero emission vans is to be reduced to nil from 2021/22.


Covid-19: Business rate help for smaller businesses

Adrian Mooy - Monday, April 06, 2020
As the Government’s response to the Covid-19 pandemic evolves, various measures have been announced to help business struggling to cope with the impact of the virus. The measures include help through the business rate system for smaller businesses and those in certain sectors.


Grants for businesses eligible for small business rate relief


Full (100%) small business rate relief (SBBR) is available for businesses where the rateable value of their business premises is £12,000 or less. Where the rateable value is between £12,001 and £15,000, reduced SBRR is available, tapering from 100% where the rateable value is £12,000 to nil where the rateable value is £15,000 or above.


To help businesses that pay little or no business rates, it was announced at the time of the Budget that funding would be provided to local authorities to provide businesses eligible for SBBR with grants of £3,000. However, following the Budget, the Chancellor announced an increase in the amount of the grant, to £10,000. The grant is a one-off grant designed to help eligible businesses to meet their on-going business costs. The grants will be available to businesses that receive full or tapered SBRR or rural relief.


Businesses do not need to claim the grants – local authorities will write to businesses that are eligible.


Retail, leisure and hospitality sectors


To help sectors that are being hit particularly hard during the Covid-19 pandemic, retail business rate relief is to be doubled from 50% to 100% for 2020/21 and extended to businesses in the leisure and hospitality sectors, providing them with a business rate holiday for 2020/21. The holiday will apply to eligible businesses in England where the rateable value of their business premises is less than £51,000. It will apply where the premises are used wholly or mainly as:


 • shops, restaurants, cafes, drinking establishments, cinemas and live music venues;
 • for assembly or leisure;
 • as hotels, guest and boarding premises and to provide self-catering accommodation.
Businesses eligible for the holiday do not need to take any action – it will apply to the council tax bill in April 2020. However, where a bill has already been issued, councils may need to reissue a bill to exclude the business rate charge.
Businesses in the retail, leisure and hospitality sectors will also be able to benefit from a cash grant of up to £25,000 where the rateable value of their business premises is £51,000 or less. The grant is set at £10,000 where the rateable value is £15,000 or less, and at £25,000 where the rateable value is between £15,001 and £51,000. Business do not need to claim the grants – local authorities will write to businesses that are eligible.


Nursery business


A business rates holiday for nursery businesses is being introduced for 2020/21. It will apply to nursery businesses based in England in premises occupied by providers on Ofsted’s Early Years Register and used wholly or mainly for the provisions of the Early Years Foundation Stage. Local authorities will apply the holiday automatically, although this may involve re-issuing bills that have already been issued.


Annual investment allowances

Adrian Mooy - Saturday, April 04, 2020
From January 2019, businesses considering investing more than £200,000 in plant and machinery may benefit from a change to the capital allowances rules, which should allow them to obtain tax relief at a much earlier time.


Broadly, business profits, after any adjustments for tax purposes (for example depreciation of fixed assets), are reduced by capital allowances to arrive at taxable profit. Since capital allowances are treated as a trading expense of a particular accounting period, they can potentially increase a loss, or turn a profit into a loss for tax purposes. This in turn, will have an impact on the amount of tax payable by a business - so where a business is considering expenditure on qualifying items, it may be beneficial to undertake some upfront planning.


Annual investment allowance


The annual investment allowance (AIA) for capital allowances purposes is a 100% allowance for qualifying expenditure on machinery and plant. Put simply, this means that a business buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from the business’s profit before calculating how much tax is due on that profit.


VAT-registered businesses claim the AIA on the total cost of the asset less any VAT that can be reclaimed on that asset. Non-VAT-registered businesses can claim the AIA on the total cost of the asset.


The AIA was set at its current level of £200,000 from 1 January 2016, but it was announced in the 2018 Autumn Budget that, subject to enactment, the limit will be increased to £1,000,000 from January 2019. This measure is designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery. However, the increase will only be available for a limited time. Under current proposals, the AIA limit will revert to its current level from 1 January 2021. Businesses considering making significant investments in, say, the next five years, may wish to consider bringing their purchase forward, so as to benefit from the increased AIA limit and obtain immediate tax relief on their investment.


Where a business spends more than the annual AIA limit, any additional qualifying expenditure will still attract relief under the normal capital allowances regime, but this will result in relief being spread over several years, rather than in one go.


It is worth remembering that connected companies are only entitled to one AIA between them.


Transitional rules


The legislation includes a series of transitional rules, which can be complex. It is worth seeking guidance where expenditure on qualifying AIA items is being considered and the business has a chargeable period that spans either of:


 • the operative date of the increase to £1,000,000 on 1 January 2019, or
 • the operative date of the reversion to £200,000 on 1 January 2021.


Running a business from home

Adrian Mooy - Saturday, April 04, 2020
Small businesses can choose to be taxed on the basis of the cash that passes through their books, rather than undertaking the more complex accounting calculations designed for larger businesses. This is known as the ‘cash basis’, and where a business opts to use it, it will also be possible for that business to use certain simplified arrangements for claiming expenditure in working out taxable profits for income tax purposes. Flat rate expenses can be claimed for business costs for vehicles, working from home, and living at the business premises.


Working from home


Where a business owner runs the business from home they will be able to claim flat rate expenses for business use of the property. This means that it will not be necessary to work out the proportion of personal and business use, for example, how much of their utility bills relate to business use. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are as follows:


Number of hours worked per month   Applicable amount
25 or more                                          £10.00
51 or more                                          £18.00
101 or more                                        £26.00


HMRC's view is that ‘number of hours worked’ means hours spent wholly and exclusively on ‘core business activities’ in the home with core business activities comprising the provision of goods and/or services, the maintenance of business records and marketing and obtaining new business.




John worked 60 hours from home for a period of 10 months, and worked 110 hours during two particular months. He can claim the following amount against his income for tax purposes:


10 months x £18.00 = £180.00
2 months x £26.00 = £52.00
Total amount claimed = £232.00


Living at the business premises


Some businesses use their business premises as their home, for example, hotels and guesthouses. Where a premise is used for both business and private use, the business owner may, instead of making the standard deduction outlined above, make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:


Number of relevant occupants  Applicable amount
1                                                £350
2                                                £500
3 or more                                   £650


A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.


Sandy runs a guesthouse and also lives there all year round with her husband. Her overall business expenses are £10,000. She can claim a flat rate deduction for private use as follows:


12 months x £500 per month = £6,000
Expenses claimed against income £10,000 - £6,000 = £4,000
Where a person claims a flat rate deduction, they are still able to claim a separate deduction for fixed costs such as council tax, insurance and mortgage interest.


Expenses checker


You don’t have to use simplified expenses. You can decide if it suits your business. HMRC provide a simplified expenses checker, which can be used to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. The checker can be found online at




Anyone wishing to utilise the simplified expenses regime should ensure that they keep records of business miles for vehicles, the number of hours worked at home, and details of people living at the business premises over the year. At the end of the year, work out how much can be claimed and include these amounts of your self-assessment tax return.


Take advantage of interest-free loans

Adrian Mooy - Friday, April 03, 2020
Employers can offer employees a tax-free cheap or interest-free loan of up to £10,000 per year.


Subject to a few conditions, as long as the total amount outstanding on all loans from an employer to an employee does not exceed £10,000 at any time in the tax year, then the loans are ignored for the purposes of the rules on beneficial loans for both income tax and national insurance contributions purposes.


No taxable benefit-in-kind will arise where:


 • the loan has been made on commercial terms by employers who lend to the general public; or


 • the total of all loans made to an employee does not exceed £10,000 at any time in the tax year.


It is important to remember that this is an all or nothing exception. If, however briefly, the loan balance rises above £10,000 at any time in the tax year, then the exception will not be available and the benefit-in-kind will be taxed in full.




In March 2020, Jim (a higher-rate- 40% taxpayer) needs to renew his annual season ticket to travel to work, which costs £8,200. To pay for this out of his take-home pay he would need to earn gross pay of £14,138 (£14,138 less tax at 40% (£5,655) and Class 1 NICs at 2% (£283)).


If his employer gives him an interest-free loan of £8,200 to enable him to buy the season ticket, it only costs Jim the £8,200 he borrows and subsequently repays to his employer. Providing the total of all beneficial loans made to Jim by his employer is less than £10,000, no taxable benefit arises, so the cost of the benefit is nil.


In addition, since the loan is not salary, his employer will not have to pay secondary Class 1 NICs on the amount borrowed.


Individual loans


No taxable benefit arises in respect of loans, however large, if the loan is made by an individual and it can be shown that it was made in the normal course of his/her domestic, family or personal relationships (for example, where the owners of a business make a loan to a son or daughter). HMRC are however, likely to take a close look at cases where such a claim is made.


Tax staff dealing with the tax affairs of an employer will liaise with staff dealing with the business accounts of that employer before agreeing that this exemption applies. If the loan is shown as an asset in the accounts of the employer’s business, HMRC will be less inclined to accept that this was made in the course of a private relationship.


This exemption can only apply where the lender is an individual. It cannot, therefore, apply where a loan is made by a company, even where that company is controlled by somebody with the relevant personal relationship. However, certain loans can be chargeable under the employment-related loan rules where they are made by an individual having a material interest in a close company. In these cases, where the loan is made by the individual with the material interest, the exemption for loans made in the course of personal relationships can still be available.


Similarly, no tax charge can arise if an employee is able to demonstrate that he has derived no benefit from a loan made to a relative of his. This exemption applies to the charge in respect of a loan and also applies where a debt is released or written off.


Loans to directors


Loans to directors are prohibited under the Companies Act 2006, though loans not exceeding £10,000 are permitted and larger loans may now be made with approval of the members.


Auto enrolment threshold changes for 2020/21

Adrian Mooy - Wednesday, April 01, 2020
New thresholds
The government has set the bands and thresholds for workplace pensions. These apply for paydays on or after 6 April 2020. For employees between 22 and 74 where you pay at the rate of:


 • £6,240 per year, they are entitled to join your workplace pension and contribute to it but they do not have to.


 • Between £6,241 and £10,000 per year, they can choose to join your workplace pension. If they do, both you and they must contribute to it.


 • More than £10,000 per year, you must auto-enrol them in your workplace pension and both you and they must contribute.


From April 2020 you will only have to contribute to an employee’s workplace pension if they join your scheme and you pay them at the rate of £6,240 or more per year.