Tax rates and allowances for limited company directors

If you are a company director, it is important to be aware of Income Tax and National Insurance rates and thresholds, dividend tax requirements, and the way in which you can pay yourself through a limited company.

Ideally, you should consult an accountant for professional advice and tax-saving strategies, but we’ll provide a brief overview of tax rates and allowances to get you started.

The tax rates and allowances stated in this article apply to the 2024/25 tax year, which runs from 6th April 2024 to 5th April 2025.

What tax does a company director pay?

Directors of limited companies are usually also shareholders. In fact, many small startup companies are one-person operations, whereby the only person who owns, manages, and works for the company is the single director-shareholder-employee. Whatever the setup, the following tax rates and allowances may apply:

Income Tax

As a company director, you are normally classed as an employee for tax purposes, so you will need to register your company as an employer and operate Pay As You Earn (PAYE) as part of your payroll.

You will be required to pay Income Tax and Class 1 National Insurance contributions (NIC) through PAYE on the wages you receive from the company.

No tax or NIC will be due on the first £12,570, which is your tax-free Personal Allowance for the 2024/25 tax year. Above that amount, you will start paying Income Tax and National Insurance on your earnings.

If you live in England, Wales, or Northern Ireland, you’ll pay the following Income Tax rates on your director’s salary:

• 20% basic rate – salary income between £12,571 and £50, 270
• 40% higher rate – between £50, 271 and £125,140
• 45% additional rate – from £125,141

If you live in Scotland, you’ll pay the Scottish Income Tax rates on your director’s salary:

• 19% starter rate – salary income between £12,571 and £14,876
• 20% basic rate – between £14,877 and £26,561
• 21% intermediate rate – between £26,562 and £43,662
• 42% higher rate – between £43,663 and £75,000
• 45% advanced rate – between £75,001 and £125,140
• 48% top rate – from £125,141

The Personal Allowance is the same for everyone in the UK, regardless of which Income Tax rates you pay. However, your allowance will gradually reduce when you start earning more than £100,000 a year, and you won’t receive any Personal Allowance if you earn over £125,140.

Employee’s National Insurance

You will pay 8% Class 1 employee National Insurance on wages between the primary threshold (£12,570) and the upper earnings limit (£50,270/year). Above the upper earnings limit, you will pay 2% NIC. These deductions will be calculated and taken directly from your wages through PAYE.

Employer’s National Insurance

Dividend tax

Dividends are paid from profits after the deduction of Corporation Tax. This means that companies pay tax on this income before it is distributed to shareholders. The rules on dividend tax changed on 6th April 2016. Previously, there was no personal tax liability on dividend income for basic-rate taxpayers.

What are dividends? How to issue dividends in a company limited by shares What are the dividend tax rates in the UK?

As a result of these new rules, it’s not quite as tax-efficient to take a low salary and higher dividend payments through a limited company as it once was, though it is a far simpler system. The notional 10% dividend tax credit (which most people struggled to understand anyway) was abolished and replaced with a tax-free dividend allowance, which is now £500/year for 2024/25.

Above the £500 allowance, you will pay the following rates of tax on dividend income you receive from your company:

• 8.75% on income within the basic-rate tax band (£12,571 to £50,270)
• 33.75% on income within the higher-rate tax band (£50,271and £125,140)
• 39.35% on income within the additional rate tax band (above £125,140)

Dividend income is still paid from post-tax profits, so your company will continue to pay Corporation Tax on these profits before you pay yourself dividends. The idea behind the changes was to discourage people from setting up a company simply to pay less tax – i.e. by taking most or all of their income as dividends rather than as a wage.

Self Assessment guidance for company directors and shareholders How to pay yourself through a limited company 15 reasons you need an accountant for a limited company

Regardless, trading through a limited company is often more tax-efficient than operating as a sole trader (depending on your level of profits). You just have to be strategic with your tax planning and remuneration, which any decent accountant or tax advisor will be able to assist you with.

Class 4 National Insurance contributions

Whilst not applicable to directors unless they receive untaxed income from self-employed activities (e.g. rental income from privately owned property), it’s worth mentioning this type of National Insurance for clarity.

Class 4 National Insurance is paid through Self Assessment by certain people, including:

• self-employed sole traders and members of partnerships
• people who receive certain types of income not taxed through PAYE (e.g. rental income or freelance work)

These NICs apply when earnings from self-employment exceed the NIC lower profits limit of £12,570. From 6 April 2024, the rates of Class 4 National Insurance are 6% on income between £12,571 and £50,270, then 2% on anything over £50,270.

Registering for Self Assessment

If you receive dividends, you’ll need to register for Self Assessment. You will then report your dividend income on an annual Self Assessment tax return and pay any dividend tax you owe directly to HMRC.

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Likewise, if you receive any other forms of untaxed income from your limited company or elsewhere (e.g. expenses and benefits, a director’s loan, income from property, side hustle earnings), you must register for Self Assessment, file a tax return each year, and pay any Income Tax and NIC that you owe.