You must adhere to certain rules and restrictions when you pay yourself through a limited company. Your company is a legal ‘person’ in its own right, which means that it’s financially independent of its directors and shareholders. Consequently, you cannot use company funds as your own unless you pay yourself through appropriate means. Until then, any money that your company receives belongs to the business, not you.
The most tax-efficient and widely used form of remuneration is a combination of a director’s salary and dividend payments. This strategy is possible if you are both a director and shareholder of your company, which is commonplace in most small firms.
Directors are classed as employees for tax purposes, whilst shareholders are classed as investors. This means that any person who is a director and shareholder of their own limited company can pay themselves a regular director’s salary and then top up their income with dividend payments from shares.
We discuss this in more detail below, so you should have a basic understanding of your options by the end of the post. That being said, we always recommend seeking professional advice from an accountant.
Paying yourself a director’s salary
Just like employees’ wages, your director’s salary is a tax-deductible business expense. This means that your salary is paid before accounting for Corporation Tax on company profits, so your company won’t be liable to tax on whatever amount you take.
To pay yourself a director’s salary, you will need to register your company as an employer and operate PAYE (Pay As You Earn) as part of your payroll. You can take your annual salary through PAYE at regular intervals, such as weekly, fortnightly, or monthly.
You won’t pay any tax or Class 1 employee National Insurance contributions (NIC) on the part of your salary that falls within your tax-free Personal Allowance (£12,570 for 2024/25).
If you earn more than that, the company will deduct Income Tax and National Insurance from your earnings, which HMRC will collect through PAYE. The company will also pay Class 1 employer’s National Insurance on your salary earnings above the current NIC Secondary Threshold of £9,100 per year.
To pay yourself through a limited company in the most tax-efficient manner, you may wish to consider one of the following three director’s salary options.
1. A salary of £12,570 per year
Some directors choose to take a salary up to the National Insurance Primary Threshold. This is £12,570 for the 2024/25 tax year – the same as the Personal Allowance.
You won’t have to pay any Income Tax or employee NIC on your salary. However, the company will have a small amount of employer’s National Insurance to pay on the portion of salary income between £9,100 and £12,570.
2. A salary of £9,100 per year
Another popular option is to take a salary up to the Secondary Threshold of £9,100, which results in no Income Tax, employee NIC, or employer’s NIC deductions.
With this level of salary, you’ll still receive National Insurance credits even without paying any NIC. This means that your access to contributory benefits will be protected.
3. A salary of £6,396 per year
This is the smallest salary you can pay yourself and still receive National Insurance credits without actually paying NIC. You won’t pay any Income Tax either, nor will the company be required to pay employer’s NIC
If you take a salary of less than £6,396, which is the NIC Lower Earnings Limit for 2024/25, you’ll need to make voluntary Class 3 National Insurance contributions to get access to contributory benefits, including the State Pension. The current rate of Class 3 NIC is £17.45 per week.
Paying Income Tax and National Insurance on a director’s salary
If you live in England, Wales, or Northern Ireland, you will pay the following rates of Income Tax on your director’s salary in the 2024/25 tax year:
- Personal Allowance: 0% on annual income up to £12,570
- Basic rate: 20% between £12,571 – £50,270
- Higher rate: 40% between £50,271 – £125,140
- Additional rate: 45% above £125,140
If you live in Scotland, you will pay the following rates of Scottish Income Tax on your director’s salary in the 2024/25 tax year:
- Personal Allowance rate: 0% on annual income up to £12,570
- Starter rate: 19% between £12,571 and £14,876
- Basic rate: 20% between £14,877 and £26,561
- Intermediate rate: 21% between £26,562 and £43,662
- Higher rate: 42% between £43,663 – £75,000
- Advanced rate: 45% between £75,001 and £125,140
- Top rate: 48% from £125,141
You will not be eligible for the Personal Allowance if your annual income is £125,140 or more. This is because your Personal Allowance will decrease by £1 for every £2 of adjusted net income above £100,000.
The Class 1 employee National Insurance contributions that you will pay on a director’s salary are:
- 8% on earnings above the Primary Threshold up to and including the Upper Earnings Limit of £50,270 per year (£967 per week, £4,189 per month)
- 2% on the balance of your earnings above the Upper Earnings Limit
The company will also pay 13.8% employers’ National Insurance on your director’s salary income above the Secondary Threshold, which is currently £9,100 per year (£175 per week, £758 per month ).
From 6 April 2025, the rate of employers’ National Insurance will increase to 15%, and the Secondary Threshold will be reduced to £5,000 per year.
Taking shareholder dividends
Dividends are paid to shareholders from limited company profits after Corporation Tax has been deducted. Unlike salaries, they cannot be counted as a tax-free business expense. This means that you can only issue dividends if the company has remaining profits after accounting for Corporation Tax.
If there is no surplus income after deducting running costs, salaries and wages, and business taxes, you cannot pay yourself dividends. Any such payments would be classed as illegal dividends.
Given that a company’s profits will fluctuate, you can choose to issue dividends on a fixed schedule, like salary payments, or on an ad-hoc basis when the company has sufficient surplus cash to justify dividends.
Many company owners choose to reinvest at least some of their trading profits in the business, rather than taking all excess money as dividend payments. It is also sometimes beneficial to leave surplus cash in your company until a future tax year, for example, to avoid going into a higher Income Tax band.
Paying tax on dividends
A common misconception is that dividend income is tax-free. This is incorrect. Whilst shareholders do get a £500 tax-free dividend allowance in the 2024/25 tax year, they are legally required to pay tax on dividend income above that amount.
Dividend income above £500 is subject to the following tax rates, which are based on your Income Tax band:
- 8.75% if you are a basic-rate taxpayer
- 33.75% if you are a higher-rate taxpayer
- 39.35% if you are an additional-rate taxpayer
To work out how much dividend tax you need to pay, you must calculate your total annual income from all sources, including your director’s salary, dividend payments, and any other taxable income you receive.
Depending on how much you earn in a tax year, you may not have any dividend tax to pay, or you may have to pay one or more of the above rates.
These dividend tax rates and thresholds apply to taxpayers in all UK nations, including Scotland. However, the tax does not apply to dividends from shares in an ISA.
As a company shareholder, you are responsible for declaring this income to HMRC by filing a Self Assessment tax return. If you’ve not already done so, you’ll first need to register for Self Assessment.
Directors’ loans
Directors can also withdraw money from a limited company by way of a director’s loan. This applies when you take money from a company that is not:
- your director’s salary
- dividend payments
- reimbursement of expenses
- money that you have already paid into the company
- money that you lend to the company
If you borrow money from (or lend money to) your company in the form of a director’s loan, you must keep a record of the transactions in a director’s loan account.
You may be liable to tax on a director’s loans. Your company may also have to pay tax if you are a shareholder and director. It depends on whether the loan account is overdrawn (you owe money to the company) or in credit (the company owes you money), and for how long.
Thanks for reading
We hope this post has been helpful. As always, we recommend speaking to an accountant for professional advice tailored to your individual circumstances.
Please leave a comment below if you have any questions, or get in touch with our London-based team if you’d like to speak to us about setting up a limited company or purchasing our services.
