Most Tax-Efficient Director's Salary and Dividends for 2024/25

As a company director, understanding the most tax efficient way to pay yourself as a director is important. This involves making strategic decisions about your income, balancing your salary and dividends, and taking advantage of various tax reliefs and allowances. By doing so, you can maximise your take-home pay while minimising your tax liabilities.

Tax efficiency is not just about paying less tax; it’s about paying the right amount. For directors, being tax-efficient means keeping more of your earnings while complying with HMRC regulations. Efficient tax planning can lead to significant savings, allowing you to reinvest more money back into your business or personal ventures.

Directors often have more flexibility than employees in choosing how to structure their income. This flexibility provides opportunities to optimise tax efficiency through various strategies, such as drawing a combination of salary and dividends, making pension contributions, and claiming business expenses.

This guide aims to simplify complex tax concepts, providing clear, actionable advice that you can implement. By the end of this article, you should have a solid understanding of how to structure your income as a director in 2024/25 to optimise tax savings and enhance your financial well-being.

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As a director, you have several options when it comes to paying yourself. Understanding these options and their tax implications is crucial for maximising your take-home pay.

Salary vs. Dividends

Salary: 

Your salary is a fixed amount of money paid to you by your company at regular intervals, typically monthly. It’s a straightforward form of compensation that works much like the wages paid to regular employees. Salaries are subject to income tax and National Insurance contributions (NICs).

Income Tax Rates and Thresholds for 2024-25

The yearly tax-free personal allowance in 2024 is £12,570. This means the first £12,570 of your personal income is tax exempt. However, if your earnings exceed £100,000 for the 2024/25 tax year, your personal allowance decreases by £1 for every £2 earned over that threshold.

Above the personal allowance, the following Income Tax rates apply to your director’s salary:

National Insurance Rates and Thresholds for 2024-25

For the 2024-25 tax year, the Class 1 employee National Insurance rate is 8%, which means, you will pay 8% Class 1 NICs on your director's salary between £12,570 and £50,270. Any earnings above this range will be subject to a 2% rate. Additionally, your company will pay 13.8% Class 1 employer's NICs on your salary income exceeding £9,100.

Dividends: 

Dividends are payments made to shareholders out of a company's profits. As a director, you can pay yourself dividends if your company is profitable. Unlike salaries, dividends are not considered business expenses and are paid out of after-tax profits. This means that your company must pay Corporation Tax on its profits before distributing dividends.

Dividend Tax Rates for 2024-25

Dividends are taxed differently from salaries. You receive a £500 dividend allowance for the 2024/25 year, which is tax-free. Beyond this allowance, dividend income is taxed at different rates depending on your total taxable income:

Dividends are not subject to NICs, making them a tax-efficient way to extract profits from your company.

Other Income Sources

Benefits in Kind

Benefits in kind, also known as fringe benefits or perks, are non-cash benefits provided by your company. These can include things like company cars, health insurance, and other perks. Benefits in kind are subject to income tax and, in some cases, NICs. The value of these benefits must be reported on your P11D form and included in your total taxable income.

Pension Contributions

Pension contributions can be a highly tax-efficient way to save for retirement while reducing your taxable income. Contributions made by your company into your pension scheme are considered an allowable company expense, reducing your company's taxable profits and its Corporation Tax bill. You, as an individual, do not pay tax on these contributions, and they are not subject to NICs.

To find the most tax-efficient salary for a director in 2024/25, consider the Class 1 National Insurance contributions thresholds and the tax-free personal allowance. Unless you plan to take all your personal income as a salary rather than a mix of salary and dividends, consider below three most tax efficient salary levels for 2024/25:

1. Pay yourself at least the NIC Lower Earnings Limit of £6,396.
2. Take a salary up to the NIC secondary threshold of £9,100.
3. Pay yourself up to the NIC Primary Threshold of £1,048 and personal allowance limit of £12,570.

Option 1 – Pay yourself at least the NIC Lower Earnings Limit of £6,396

To maintain your State Pension entitlement and other benefits, you should pay yourself a minimum NIC Lower Earnings Limit (LEL) of £6,396 for the year 2024/25 (£533 per month or £123 per week).

With this salary, you won’t pay Income Tax. Additionally, neither you nor your company will have to pay Class 1 National Insurance on this income, yet you will still receive the benefits of paying NICs.

If you pay yourself a salary below the LEL, you won't earn NIC credits unless you make voluntary National Insurance contributions.

Option 2 – Take a salary up to the NIC secondary threshold of £9,100

For the 2024-25 tax year, the Secondary Threshold is set at £9,100, where an employer must begin paying Class 1 employer’s National Insurance (secondary contributions) on their employees’ and directors’ wages.

By paying yourself up to £9,100 through PAYE, you won’t be subject to Income Tax or Class 1 employee NICs on your director’s salary. Moreover, your company won’t have to pay any secondary contributions on this salary.

Option 3 – Pay yourself up to the NIC Primary Threshold of £1,048 and personal allowance limit of £12,570

Pay yourself up to the NIC Primary Threshold (PT) of £1,048 per month i.e £12,570 per year if your company is eligible to claim the Employment Allowance. As this threshold aligns with the annual tax-free Personal Allowance of £12,570, you won’t pay any Income Tax on your director’s salary.

Although your company will need to pay 13.8% secondary contributions on your salary between £9,100 and £12,570, you can use the Employment Allowance to reduce the company’s annual National Insurance liability by up to £5,000.

To determine the dividends, you must first deduct Corporation Tax from your business profits. HMRC sets lower personal tax rates on dividends to account for the tax already paid by the company.

The amount you can receive as dividends depends on:

• The distributable profit of your company after Corporation Tax.
• Your shareholding percentage in the company.
• Your strategy to avoid entering higher tax brackets.

When your total personal income, including salary and dividends, exceeds the Personal Allowance of £12,570 and the dividend allowance of £500, your dividends will be taxed according to your Income Tax band. Notably, no National Insurance is payable on dividend income.

For 2024-25, you can take up to £13,070 in dividends tax-free, provided you have no other income. Amounts above this will be taxed at the relevant dividend tax rates.

Dividend tax rates are lower than income tax rates because dividends are paid from post-tax company profits. Companies typically pay between 19% and 25% Corporation Tax on profits before distributing dividends. This dual taxation approach ensures a reduced overall tax burden compared to taking all income as salary.

By combining a director's salary with dividends, you can significantly lower your tax liability, especially if you fall into higher tax brackets. The optimal mix of salary and dividends can lead to substantial savings.

Let's have a look at some remuneration scenarios using a tax-efficient combination of a director's salary and dividends. We will then compare these with taking all company profits as a salary. This comparison will help you understand the total amount of Corporation Tax and personal tax you may need to pay.

Scenario 1: Company with Annual Taxable Profits of £70,000 - Salary and Dividends Combination

Suppose your company has taxable profits of £70,000 after deducting running costs and expenses (before accounting for your salary).

• Director’s Salary: £9,100 (NIC Secondary Threshold)
• Net Profit for Dividends: £50,493.50 (after deducting Corporation Tax and director's salary)

Company Tax Breakdown:

• Profit before tax: £70,000
• Director’s salary: £9,100
• Taxable profit: £60,900
• Corporation Tax @20.34%: £12,388.50
• Net profit available for dividends: £48,511.50 (after deducting Corporation Tax)

Personal Tax Breakdown:

• Director’s salary: £9,100
• Class 1 employee NIC: £0.00
• Income Tax: £0.00
• Gross dividend income: £41,170
• Tax on dividends: £3,255

Summary:

• Gross pay: £50,270
• Take-home pay (net pay): £47,015
• Reserves left in the company : £7,341.50

Total Tax Liability:

• Corporation Tax: £12,388.50
• Personal tax on dividends: £3,255
• Total tax liability: £15,643.50

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Scenario 2: Taking Full Salary and no dividends

If you take the full £70,000 as a director's salary:

• Director’s Salary: £70,000
• Taxable profit: £0 (entire salary as a deductible expense)

Personal Tax Breakdown:

• Personal Allowance: 0% on the first £12,570 = £0.00
• Income Tax @ 20% on £37,700 = £7,540
• Income Tax @ 40% on the remaining £19,730 = £7,892
• Class 1 employee NIC (@ 8% between £12,570 and £50,270, then 2% on the remaining salary) = £3,410.60
• Employer's NIC: £8,434.20

Summary:

• Take-home pay (net pay): £52,157.40

Total Tax Liability:

• Personal tax: £15,432.60
• Employer’s NIC: £8,434.20
• Total tax liability: £23,866.80

Comparison

By combining salary and dividends, the total tax liability is £15,643.50, whereas taking the full salary results in a total tax liability of £23,866.80. The combination method saves £8,223.30 in taxes.

Assumptions considered in the above calculations:

1. You're UK resident
2. You're not caught by IR35
3. Your only income is salary and dividends. 
4. You have no outstanding student loans. 
5. You have sufficient post corporation tax profits to pay yourself dividends.

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Understanding how to structure your income as a director can lead to significant tax savings. Achieving tax efficiency requires careful planning and a good understanding of the tax regulations. As a director, you have the flexibility to choose how you structure your income, allowing you to take advantage of various tax-saving opportunities. Regularly reviewing your income structure and staying informed about changes in tax laws will help you maintain tax efficiency over time.

While this guide provides a comprehensive overview of tax-efficient strategies, every individual's situation is unique. Consulting with a personal tax accountant can provide personalised advice tailored to your specific circumstances. They can help you understand the complexities of the tax system, identify additional tax-saving opportunities, and ensure compliance with UK tax regulations.

By following the strategies outlined in this guide and seeking professional advice, you can achieve the most tax-efficient way to pay yourself as a director, ensuring that you maximise your take-home pay while minimising your tax liabilities.

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