Personal Allowances and Tax Rates 2010/2011
Detailed information can be found using the following links to HM Revenue & Customs website.
Income tax http://www.hmrc.gov.uk/rates/it.htm
National Insurance http://www.hmrc.gov.uk/rates/nic.htm
Solo Explanation:
Personal Income Tax Allowance
With effect from 5th April 2011 you will pay tax at the basic rate of 20% on the first £35,000 of income. Your Income tax will be calculated as follows: Regardless of whether you are a sole trader, a partner in a partnership or a limited company director, everyone is entitled to a personal tax allowance. A personal allowance is the amount of money that you can earn before you have to pay income tax. In the 2010/2011 tax year which runs from 6th April 2010 to 5th April 2011 you can earn £7,475 before you start paying income tax. Over £7,475 you pay basic rate tax at 20%. You will only pay higher rate tax on the balance over £42,475. . See example based on earnings of £50,000 below:
£7,475 at Nil band £0,000.00
£35,000 at 20% basic rate £7,000.00
£7,525 at 40% higher rate £ 3,010.00
£50,000 Income Tax £10,010.00
This year the Chancellor also introduced a new 10% starting rate for savings income only, with a limit of £2,320. If your taxable earned income is above the limit of £2,320 then the 10% savings rate will not be applicable.
Directors of their own limited companies will continue to benefit from the 10% dividend ordinary rate on income up to £40,835 or 32.5% dividend upper rate.
Example B If you drew a salary of £25,000 as a Director / employee of your own limited company and you paid yourself a dividend of a further £25,000 the following taxes would apply:
£6,475 Salary at Nil band £0,000.00
£18,965 Salary at 20% basic rate £3,793.00
£15,835 Dividend at 10% dividend ordinary rate £1,583.50
£9,165 Dividend at 32.5% dividend higher rate £2,978.63
£50,000 Total Income Income Tax £8,355.13
National Insurance Everybody has to pay National Insurance Contributions (NIC’s) on earnings from your employment or profits from being self employed. NIC is compulsory and therefore should be regarded as a further tax on income. Earnings for NIC purposes include pay, salary, bonuses, fees, benefits and some expenses and any non-business payments paid by your employer on your behalf. There are six types of National Insurance contribution.
Class 1 – Both the employer and the employee are obliged to pay NIC’s, which are levied on your earnings over certain limits and are not allowed as a deduction for income tax purposes. These contributions are earnings related and are payable by most employees including Directors. As a Director you are an employee but you are also an employer. Employee contributions are called primary contributions and the employer contributions are called secondary contributions. As employer 13.8% is due on earnings above £136 per week. As employee 12% is due on earnings above £136 per week and including earnings of up to £602 per week. Thereafter 2% is due on all earnings above this figure
Class 1A – Most expenses and benefits paid to employees by their employers are subject to Class 1A NIC. These are usually reflected on a P11D, an annual form which must be completed for all employees who have received earnings, expenses and benefits of over £8,500 in the course of the tax year. It must be completed for all Directors regardless of their earnings level. 13.8% is payable by employers, calculated on the individual’s assessable benefit.
Class 1B – Payable by employers for PAYE settlement agreements only.
Class 2 – A flat rate currently £2.30 per week payable by self employed persons or by individuals who have a second source of self employed income. If your earnings from self employment are less than £4,825 you may apply at the local tax office to be exempted on the grounds of small earnings.
Class 3 – If you have previously underpaid Class 1 or Class 2 NIC’s, it may be necessary for you to make voluntary contributions to qualify for some NIC benefits, you do this under Class 3 by paying £8.10 per week.
Class 4 – Self employed persons pay class 4 contributions in addition to Class 2. Class 4 contributions are earnings related and are assessed at the same time as your income tax is calculated. A self employed person is obliged to pay 8% of his profit chargeable to tax between £7,475 and £42,475. On profits exceeding £42,475, 1% is due on the balance thereafter. If you are obliged to pay class 1 as an employee and you have self employed earnings subject to Class 2 and 4 you should contact Solo Accounting or an equally suitably qualified Accountant for advice.
Example C If you earned £50,000 as salary in the tax year, as an employee, the calculation for Class 1 NIC would be as follows:
As employee
£7,475 at Nil £0,000.00
£42,475 at 12% primary class 1 £4,404.40
£4,525 at 2% primary +upper earnings limit £ 45.25
£50,000 primary Class 1 NIC £4,449.65
As employer
£6,475 at Nil £0,000.00
£44,565 at 13.8% secondary class 1 £5,704.32
If you are both the employee and the employer the total payable is £10,153.97
Example D If you drew a salary of £25,000 as a Director / employee of your own limited company and you paid yourself a dividend of a further £25,000 the following NIC would apply:
As employee
£6,475 Salary at Nil band £0,000.00
£19,565 at 11% primary class 1 £2,152.00
Dividend
£25,000 No NIC due on Dividend £0,000.00
As employer
£6,475 at Nil £0,000.00
£19,565 at 12.8% secondary class 1 £2,504.00
£50,000 NIC due £4,656.00