If you’re on this page, you may be wondering if you should be taking most of your income from salary or dividends…
It’s difficult to have a one size fits all approach to setting a tax efficient salary for a contractor. Especially, as there are other factors that can influence the decision, such as your IR35 status.
We have looked at salary and dividends in isolation, and for the purposes of this advice, we assume you are outside IR35.
Tax Rates For Salary And Dividends In 2021/22 Tax Year
The personal allowance has increased from £12,500 to £12,570
Also the higher tax band has increased from £50,000 to £50,270
For income above this the tax rates are below ** (dividends tax rates are separate)
£12,570 to £50,270 20%
£50,271 to £150,000 40%
£150,001 & over 45%
** there are different rates for Scottish tax payers
Dividend Tax Rates In 2021/22
The dividend allowance remains at £2,000 as last year.
Above this £2,000, dividend income is taxed:-
- If you have any un-used personal allowance (£12,570), that element is tax free
- Dividends below the basic tax band (up to £50,270) taxed at 7.5%
- Dividends above the basic tax band (over £50,270) taxed at 32.5%
- Dividends in the upper tax band (£150,000+) taxed at 38.1%.
How To Pick A Sensible Salary As A Contractor In 2021/22
This is ultimately your decision and you can chose whichever salary you think best, however, this guidance attempts to find a sensible salary as a guide.
As the national living wage has increased to £8.91 per hour, we need to consider the implications of this for drawing an income as a contractor.
We believe that a safe strategy would be to take a salary of £16,216 (£8.91 x 35 x 52), say £16,300, as this is less likely to draw attention to you or your business from HMRC.
Please contact your Rodliffe accountant directly to confirm the salary you wish to take next year. Naturally, you can draw less than this, but in light of the personal allowance being £12,570 we consider the above advice to be logical.
If you wish to draw dividends so that you keep to the high tax threshold then the dividend would be £33,970 (therefore salary £16,300 and dividends would be £50,270 (the high rate threshold)).
Please note, this advice may not be relevant if you are a small business owner rather than a contractor.