Being a company director means you can take a more flexible approach to how and when you pay yourself. In most cases this means taking a tax-efficient ‘split’ income, where part of the money you pay yourself from the company comes from a salary, and the other part comes from dividends.

The road to tax-efficient success essentially means taking advantage of any personal allowances and tax-free options. At the same time, you’ll also want to minimise Corporation Tax and avoid other company liabilities if at all possible (legally, of course).

What are the advantages of taking dividends and a salary?

There are some big considerations here, including:

• You can have some form of regular income as a salary, and then larger dividend payments to top it up
• The salary part can be offset against the company’s Corporation Tax bill because it counts as an allowable expense
• You’ll qualify for a state pension
• You don’t pay any National Insurance on dividends

And the disadvantages of the split option?

You should consider the following potential pitfalls too:

• You will need to run a PAYE scheme (which isn’t always straightforward)
• Paying out dividends means paperwork – even if you’re the sole owner and director!
• Whilst dividends aren’t subject to National Insurance, they are subject to dividend tax. In 2024/25 you can take dividends up to £500 before starting to pay tax on them, thanks to the Dividend Allowance.

What taxes will a company director pay on their income?

Tax is inevitable, as the saying almost goes, so whichever way you pay yourself from your company, you’re likely to pay tax on it at some point.
 

What you’ll pay on the salary part

Just like any other employee, directors who take a salary are subject to income tax and National Insurance rules. These will be deducted at source (taken from your wages) by the ‘employer’ – in this case, your own limited company. You’ll report these and pay the deductions on to HMRC through PAYE.

The good news is that wages are a business expense. This means you can include them in your Company Tax Return, and offset your wages bill against Corporation Tax.

National Insurance Contributions (NIC) on PAYE for directors

Both employees and their employers must make Class 1 National Insurance Contributions where earnings reach the NI threshold.

This is why NI is so important for a company director, because in this case you’re both the employee, and the employer. To avoid paying two lots of NI on the same income, directors usually pay themselves a smaller salary which falls below the NI threshold.

Income Tax on PAYE

The Personal Allowance is the amount that you can earn in a tax year before you start paying tax. You’ll only pay tax on anything you earn over the allowance threshold. This year’s threshold is £12,570.

The tax brackets and rates shown below apply in England, Wales, and Northern Ireland. Scotland uses a different set of brackets and rates, which we’ll explain next. These rates don’t apply to dividend payments – they’re taxed differently (because tax rules are fun like that).

Tax bands and thresholds in England, Wales, and Northern Ireland

Remember: If your adjusted net income exceeds £100,000, your Personal Allowance will go down by £1 for every £2 earned above that amount. So, in effect, if you draw a salary of more than £125,140 your personal tax-free allowance will be zero.

Tax bands and thresholds in Scotland

What taxes must be paid on dividends?

Directors will need to pay tax on any payments that exceed the Dividend Allowance of £500 a year in 2024/25, or £1,000 in 2023/24. How much you’ll pay depends on the income bracket you fall under, but the good news is that rates are lower than they are for salaries and other income. You’ll need to work out your tax band by adding together all of your income for the tax year.

The dividend tax rate is the same in England, Wales, Northern Ireland and Scotland. For 2024/25 the rates are:

• Basic rate taxpayers: 8.75%
• Higher rate taxpayers: 33.75%
• Additional rate: 39.35%

Dividend payments are not classed as a business expense, unlike salaries. This means they can’t be deducted from the company’s Corporation Tax bill. As dividends are a proportion of the company’s profits, the company will have already paid Corporation Tax on that income before the dividend is paid out.

Is there a limit to how much can be taken in dividends?

Technically no, but it’s a good idea to only take what is necessary as a dividend, and leave anything else in the company as retained earnings. However, what you choose to take in dividends depends on unique financial circumstances (both yours and the company’s) and how much profit the company has made.

It’s also worth keeping in mind any other dividend payments you might be expecting. The £500 Dividend Allowance applies to all of the dividends that you receive in a year, not just from the company you run day-to-day. So, if you own shares in other companies, you might want to check how much of your tax-free allowance you’ve already used up.

What about directors’ loans?

A director’s loan is essentially any money a director takes from a company that isn’t classed as a dividend, salary, or allowable business expense. The loans can also work the other way around; in other words, directors can lend money to the company to help with any cash flow issues or to buy extra equipment, for example.

Directors’ loans can be a very useful tool for short-term borrowing. Just keep in mind that there are strict rules about accounting for director’s loans, how long the loans can last, and how they should be repaid. If they aren’t paid back on time, then the money will be subject to tax.

How do allowable expenses work with salary and dividend payments?

There are quite a few allowable business expenses that company owners can make use of to reduce their tax bill.

We won’t go into every single claimable expense and benefit now because they’ll apply to each company differently, and frankly, we’d be here all day. However, as a guide, common allowable business expenses include:

• Travel expenses, meals, and entertainment costs
• Costs relating to training
• Retirement and pension benefits scheme payments
• Company cars
• Fuel expenses (mileage allowances) and parking charges
• Medical insurance
• Office equipment and computers
• Childcare costs

How the expense should be reported and taxed will depend on what it is. The Gov.uk website has a wealth of benefits and expenses information, along with applicable tax rates and rules. Don’t forget, you may also qualify for some income tax reliefs.

I’m interested in pension contributions specifically. How does that work?

As you may have now cottoned on to, paying yourself as a company director revolves largely around tax efficiency. So, as well as working out the optimum salary, another way of being tax efficient is to extract the profit from your business, and pay it into a pension fund.

When a director makes a contribution to a pension fund, that amount isn’t subject to Corporation Tax, National Insurance, or Income Tax if it falls below the annual allowance for tax-free pension contributions; currently set at £60,000.

Then there’s the Employment Allowance

The Employment Allowance means that employers can reduce their annual National Insurance Contributions by up to £5,000 each tax year. This is as long as their employers’ Class 1 National Insurance liabilities were no more than £100,000 in the year before.

Employment Allowance cannot be claimed by companies that have only one director who works alone. It can be claimed if there are two or more directors, or a single director and another employee. Being able to claim the Employment Allowance impacts the amount of salary a director can take to be tax efficient. So do your sums – or get an accountant to do them for you!

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Stephanie Whalley

Serial snacker, compulsive cocktail sipper and full time wordsmith with a penchant for alliteration, all things marketing and pineapple on pizza.