As a director of a UK limited company, it’s important for you to understand the changes in tax rates and allowances that will impact your pay structure. Finding the most tax-efficient way to pay yourself can help minimise your tax liability and maximise your take-home pay.
In this guide, we’ll explore the ideal combination of salary and dividends, tax considerations, and the effect on National Insurance Contributions (NICs).
Dividend Allowance and Tax Rates for 2024/25
What is the Dividend Allowance for 2024/25?
The dividend allowance for the 2024/25 tax year is £500. This means that directors who pay themselves in dividends can receive the first £500 tax-free.
However, any dividends paid above this allowance will be subject to dividend tax. This reduction in the tax-free allowance means that directors will face higher tax liabilities on dividend income beyond the £500 limit.
This allowance has rapidly decreased since 2016/17, when it sat at £5,000. In 2018/19 it was reduced to £2,000 and then again to £1,000 in 2023/24.
Dividend Tax Rates for 2024/25
Once the £500 dividend allowance is used, dividends will be taxed at the following rates:
- Basic rate taxpayers will pay 8.75% on dividends up to £50,270.
- Higher rate taxpayers will pay 33.75% on dividends between £50,271 to £125,139
- Additional rate taxpayers will pay 39.35% on dividends over £125,140.
Understanding these tax bands is essential for structuring your income in the most tax-efficient way, ensuring that you pay only what is necessary on your dividends.
How to Pay Yourself as a Director of a Limited Company
A director’s salary is the regular income you pay yourself from your company’s profits, and it’s crucial for tax efficiency and qualifying for state benefits.
By taking a salary, directors can make use of their personal tax-free allowance, currently set at £12,570 for 2024/25. A salary ensures that directors build their National Insurance record, which counts towards state pension and other entitlements.
Most Tax-Efficient Director Salary for 2024/25
The most tax-efficient salary for a director depends on whether you are eligible for the Employment Allowance. If your company qualifies, you can pay yourself up to £12,570 annually (or £1,047.50 per month), staying within the personal allowance and below the National Insurance threshold.
For sole directors not eligible for Employment Allowance, a salary of £9,096 per year (or £758 per month) is optimal. This allows you to avoid Employer’s National Insurance contributions, saving both personal and company tax.
Combining Salary and Dividends
Paying yourself a combination of salary and dividends is the most tax-efficient approach for directors. Dividends, unlike salaries, are not subject to National Insurance contributions. Once you’ve paid yourself a modest salary, the remaining income can be taken as dividends.
Dividends are taxed at lower rates compared to salaries, so this method reduces both personal income tax and National Insurance. However, dividends above the £500 allowance will be taxed at the dividend tax rates outlined earlier.
Directors and National Insurance Contributions (NIC)
Do Directors Pay National Insurance?
Yes, directors do pay National Insurance, but the rules differ slightly from regular employees. Directors are treated as annual employees for NIC purposes, meaning their contributions are calculated differently.
National Insurance is only payable once your salary exceeds the threshold, which for the 2024/25 tax year is £12,570 for employees. However, directors can avoid National Insurance by keeping their salary below this limit.
Director’s NIC Allowance
If your company is eligible for Employment Allowance (i.e., if you have other employees), you can claim a reduction in your National Insurance Contributions. This allowance offsets up to £5,000 of your NIC bill.
Sole directors, however, are not eligible for this allowance and should manage their salary to avoid unnecessary NIC payments.
Alternative Ways to Extract Profits as a Director
Pension Contributions
One of the most tax-efficient ways to extract profits from your business is through company pension contributions. These contributions allow your company to reduce its corporation tax liability while building up retirement savings for the director.
Pension contributions are considered a business expense, meaning they are deductible from your company’s profits, reducing the overall tax burden. Additionally, company pension contributions do not count as personal income, so they won’t attract income tax or National Insurance contributions.
Timing of Dividends
Another way to optimise your tax position is by carefully timing your dividend payments. Spreading dividends across multiple tax years can help you stay within lower tax bands, particularly if your income fluctuates.
This strategy ensures you can fully utilise your personal allowance and basic rate tax band, minimising the amount of tax you pay on dividends. By managing the timing, you can keep your tax liabilities lower and avoid moving into higher tax brackets unnecessarily.
Maximising Dividend Efficiency with Ryans
At Ryans, our team of tax experts can help you to maximise your dividends efficiency, ensuring you take home the most optimal salary whilst staying compliant with HMRC’s strict tax regulations. Get in touch with our team today to discuss our personal tax planning services.
Director’s Salary and Dividends FAQs
What is the Dividend Allowance for 2024/25?
The dividend allowance for 2024/25 is £500. This means that any dividends above this amount are subject to dividend tax.
Do Directors Pay National Insurance?
Directors pay National Insurance contributions on salaries above certain thresholds, but not on dividends.
How Can Directors Minimise Dividend Tax?
Directors can minimise tax by combining salary and dividends and ensuring dividend payments stay within lower tax bands.
Can Directors Backdate Dividends?
Dividends must be declared in the year they are paid, and cannot be backdated.
This blog is intended for general information purposes only and should not be used as a substitute for professional advice.