Last updated: 19 Aug 2024
Typically, the best way to pay yourself through a limited company is to take a low director’s salary and then top up your earnings with regular dividend payments. Since tax thresholds and allowances (and sometimes rates) usually change at the start of each new tax year, it’s important to review your remuneration annually to ensure that you’re paying yourself in the most tax-efficient manner.
In this post, we explain the optimal director’s salary and dividend structure for the 2024-25 tax year, which runs from 6 April 2024 until 5 April 2025. But before we dive into that, we will clarify the Income Tax, National Insurance, and dividend tax you may have to pay on your personal income, depending on how much you earn in the year.
Tax payable on your director’s salary and dividends
As a company owner, it’s worth familiarising yourself with the different types of personal tax that may apply to the income you receive from your limited company, as well as the current rates and thresholds for 2024-25.
Directors’ salaries are subject to Income Tax and Class 1 National Insurance contributions (NICs). Dividends are subject to lower rates of dividend tax based on Income Tax bands. No National Insurance is payable on dividend income.
Let’s look at what you will pay on the director’s salary and dividend income you take from your company in the 2024-25 tax year.
Income Tax rates and thresholds for 2024-25
The annual tax-free Personal Allowance is £12,570. This means that your first £12,570 of personal income will be tax-free. However, if you earn more than £100,000 in the tax year, your Personal Allowance will be reduced by £1 for every £2 you earn above that amount.
Above the Personal Allowance, you will pay the following Income Tax rates on your director’s salary if you live in England, Wales, or Northern Ireland:
- 20% (basic rate) – income between £12,571 and £50,270
- 40% (higher rate) – income between £50,271 and £125,140
- 45% (additional rate) – income above £125,140
If you live in Scotland, you will instead pay the following Scottish Income Tax rates on your director’s salary above the Personal Allowance:
- 19% (starter rate) – income between £12,570 and £14,876
- 20% (basic rate) – income between £14,877 and £26,561
- 21% (intermediate rate) – income between £26,562 and £43,662
- 42% (higher rate) – income between £43,663 and £75,000
- 45% (advanced rate) – income between £75,001 and £125,140
- 48% (top rate) – income above £125,140
National Insurance rates and thresholds for 2024-25
National Insurance rates and thresholds are the same across the UK. The rate of Class 1 employee National Insurance for 2024-25 is 8%, having been cut from 10% in the Spring Budget 2024.
You will pay 8% Class 1 NICs on your director’s salary between £12,570 and £50,270. A rate of 2% will apply to the balance of earnings above that amount. Your company will also pay 13.8% Class 1 employer’s NICs on your salary income above £9,100.
Dividend tax rates for 2024-25
The 0% dividend allowance for 2024-25 has been cut from £1,000 to £500. Above this amount, any dividends you receive from your limited company will attract the following personal tax rates, based on whichever Income Tax band(s) you fall into:
- 8.75% (basic rate) – income from £13,070 up to £50,270
- 33.75% (higher rate) – income from £50,271 up to £125,140
- 39.35% (additional rate) – income above £125,140
To work out your tax band, you need to add your gross dividend income for the year to your other sources of income. This means that you may have to pay more than one rate of dividend tax (i.e. if you’re a higher-rate or additional-rate taxpayer).
Whilst Income Tax rates in Scotland differ, this has no bearing on dividend tax. If you are a Scottish taxpayer, you will pay tax on dividends in accordance with the above thresholds.
What is the most tax-efficient director’s salary in 2024-25?
To determine the optimal director’s salary for 2024-25, consider the thresholds for Class 1 National Insurance contributions and the annual tax-free Personal Allowance. The three most tax-efficient director’s salary levels you should consider are as follows:
- Pay yourself at least the NIC Lower Earnings Limit of £6,396 for the year
- Take a salary up to the NIC Secondary Threshold of £9,100 for the year
- Pay yourself up to the NIC Primary Threshold and Personal Allowance limit of £12,570 for the year
Unless you intend to take all of your personal income as a salary rather than pay yourself a combination of salary and dividend income, you should choose one of these options. Let’s take a look at each one in turn.
Option 1 – At least the Lower Earnings Limit
To protect your entitlement to the State Pension and benefits, the absolute minimum you should pay yourself in 2024-25 is £6,396 (£533/month, £123/week). This is the NIC Lower Earnings Limit (LEL).
You won’t pay Income Tax on your salary. Furthermore, neither you nor your company will pay Class 1 National Insurance on this income, but you will get the benefits of paying.
If you take a director’s salary below the LEL, you won’t earn NIC credits unless you make voluntary National Insurance contributions.
Option 2 – Up to the Secondary Threshold
The Secondary Threshold is the point at which an employer must start paying Class 1 employer’s National Insurance (known as secondary contributions) on their directors’ and employees’ wages.
For the 2024-25 tax year, the Secondary Threshold is £9,100, which is £758/month or £175/week.
By paying yourself up to this amount through PAYE, your director’s salary will not be subject to Income Tax or Class 1 employee NICs. Furthermore, your company won’t have to pay any secondary contributions on your salary either.
Option 3 – Up to the Primary Threshold
If your company is eligible to claim the Employment Allowance, it may be more tax-efficient to take a director’s salary up to the NIC Primary Threshold (PT) of £12,570 per year (£1,048/month, £242/week).
The Primary Threshold is the point at which employees and directors start paying Class 1 NIC on their wages. Currently, the PT aligns with the annual tax-free Personal Allowance, so you won’t pay any Income Tax on your director’s salary either.
Whilst your company will have to pay 13.8% secondary contributions on your salary income between £9,100 and £12,570, you can use your Employment Allowance to reduce the company’s annual National Insurance liability by up to £5,000.
Check if you’re eligible to claim the Employment Allowance
Be aware that your company cannot claim the Employment Allowance if:
- you are the only director and you do not employ any staff
- only one director or employee in the company is paid above the Secondary Threshold, andthat employee is a director of the company
- no directors or employees are paid above the Secondary Threshold
Additional eligibility criteria apply. Read HMRC’s general guidance on Employment Allowance to work out if your company can claim. Further guidance on single-director companies and Employment Allowance is also available.
Paying yourself dividends in 2024-25
Dividends are paid from company profits after tax. So, you need to deduct Corporation Tax from your business profits to determine how much is available to take as dividends. This is why HMRC charges lower rates of personal tax on dividend income, to account for the tax the company has already paid on that income.
The amount of dividend income you can pay yourself will depend on:
- how much distributable profit your company has available (i.e. how much profit the company has left after accounting for Corporation Tax)
- what percentage of the company you own through shareholdings (e.g. if you own 100% of the shares, you are entitled to 100% of distributable profits)
- whether you are trying to avoid entering a higher tax bracket
When your annual personal income from all sources exceeds the Personal Allowance threshold of £12,570 and the dividend allowance of £500, your dividends will be subject to tax rates based on your Income Tax band(s). However, as mentioned, you won’t pay any National Insurance on your dividend income.
This means that unless you receive a director’s salary and/or income from other sources, you can take up to £13,070 of dividends free from personal tax in 2024-25. Anything above this amount will be subject to the dividend tax rates outlined earlier in the article.
- Dividends – do all shareholders get them?
- A guide to company director pension contributions
- An introduction to Corporation Tax
While dividend tax is tied to Income Tax bands, the rates are considerably lower since companies pay between 19% and 25% Corporation Tax on their profits before issuing dividends to shareholders.
However, you will still pay less tax overall by combining a director’s salary and dividends, as opposed to taking all of your income as a salary. The tax and NIC savings will be more significant if you are a higher-rate or additional-rate taxpayer.
The best way to structure your salary and dividend income
Your director’s salary is a tax-deductible business expense. This means your company will save Corporation Tax on whatever amount you decide to take.
Dividend payments cannot be claimed as a business expense. This is why dividends can only be paid to shareholders from profits after tax. However, the lower dividend tax rates and NIC savings usually make up for this.
Some company owners limit their total annual income to remain within the basic Income Tax band and avoid paying higher rates. This is a personal choice and will depend on your circ*mstances and needs, as well as your long-term goals for the business.
We’ll look at some remuneration examples based on a tax-efficient director’s salary topped up with dividends. We will then show you how this structure compares to taking all of your company’s available profits as a salary. This will give you an idea of the total amount of Corporation Tax and personal tax you may have to pay.
Example 1 – Company with annual taxable profits of £60,000
Suppose your company has taxable profits of £60,000 after deducting running costs and expenses (but before accounting for your salary).
If you pay yourself an annual director’s salary of £9,100 (the NIC Secondary Threshold), you could take up to £41,161.50 as dividends. This is the net profit the company would have available to distribute as dividends after paying your salary and Corporation Tax.
The table below shows how this would work in practice, including a breakdown of the total tax liability:
| Company tax | Annual | Monthly | Weekly |
| Company profit before tax | £60,000 | £5,000 | £1,153.85 |
| Director’s salary | £9,100 | £758.33 | £175.00 |
| Class 1 employer’s NIC | £0.00 | £0.00 | £0.00 |
| Taxable profit | £50,900 | £4,241.67 | £978.85 |
| Corporation Tax @ 19.13% (the effective rate due to Marginal Relief) | £9,738.50 | £811.54 | £187.28 |
| Net profit available to take as dividends | £41,161.50 | £3,430.13 | £791.57 |
| Personal Tax | Annual | Monthly | Weekly |
| Director’s salary | £9,100 | £758.33 | £175.00 |
| Class 1 employee NIC | £0.00 | £0.00 | £0.00 |
| Income Tax | £0.00 | £0.00 | £0.00 |
| Gross dividend income | £41,161.50 | £3,430.13 | £791.57 |
| Tax on dividends | £3,254.26 | £271.19 | £62.58 |
| £3,470 @ 0% (remaining Personal Allowance) | £0.00 | ||
| £500.00 @ 0% (dividend allowance) | £0.00 | ||
| £37,191.50 @ 8.75% | £3,254.26 | ||
| Gross pay | £50,261.50 | £4,188.46 | £966.57 |
| Take-home pay (net pay) | £47,007.24 | £3,917.27 | £903.99 |
By structuring your personal income in this way, the total tax liability on the £60,000 profit would be £12,993. This comprises the Corporation Tax liability and personal tax on dividend income.
Taking a gross salary of £60,000 and no dividends
If you were to take the full £60,000 as a director’s salary, rather than paying yourself a combination of salary and dividends as above, the entire salary would be a tax-deductible expense for the company.
The personal tax liability on your salary would be £14,642.60, which comprises:
- Personal Allowance of 0% on the first £12,570 = £0.00
- Income Tax @ 20% on £37,700 = £7,540
- Income Tax @ 40% on the remaining £9,730 = £3,892
- Class 1 employee National Insurance contributions (@ 8% between £12,570 and £50,270, then 2% on the remaining salary) = £3,210.60
This would leave you with a take-home pay of £45,357.40
The company would also have an employer’s NIC bill of £7,024.20. Consequently, the total tax liability of your £60,000 salary would be £21,666.80
Compared to the total tax liability (Corporation Tax + dividend tax) due on the salary and dividend structure, you’d pay an extra £8,673.80 in tax by taking all of the company profits as a salary.
Example 2: Company with annual taxable profits of £80,000
In this example, let’s assume that your company has taxable profits of £80,000 after deducting running costs and expenses (but before accounting for your own salary).
If you pay yourself an annual director’s salary of £12,570 (the NIC Secondary Threshold), you could take up to £52,959.12 as dividends. This is the amount of net profit the company would have available to distribute as dividends after paying your salary, employer’s NIC, and Corporation Tax.
The table below shows how this would work in practice, including a breakdown of the total tax liability:
| Company tax | Annual | Monthly | Weekly |
| Company profit before tax | £80,000 | £6,666.67 | £1,538.46 |
| Director’s salary | £12,570 | £1,047.50 | £241.073 |
| Class 1 employer’s NIC | £478.86 | £39.91 | £9.21 |
| Taxable profit | £66,951.14 | £5,579.26 | £1,287.52 |
| Corporation Tax @ 20.90% (the effective rate due to Marginal Relief) | £13,992.02 | £1,166 | £269.08 |
| Net profit available to take as dividends | £52,959.12 | £4,413.26 | £1,018.44 |
| Personal Tax | Annual | Monthly | Weekly |
| Director’s salary | £12,570 | £758.33 | £175.00 |
| Class 1 employee NIC | £0.00 | £0.00 | £0.00 |
| Income Tax | £0.00 | £0.00 | £0.00 |
| Gross dividend income | £52,959.12 | £4,413.26 | £1,018.44 |
| Tax on dividends | £8,404.95 | £700.41 | £161.63 |
| £500 @ 0% (dividend allowance) | £0.00 | ||
| £37,200 @ 8.75% (portion of income within basic rate) | £3,255.00 | ||
| £15,259.12 @ 33.75% (remaining dividends taxable at the higher rate) | £5,149.95 | ||
| Gross pay | £65,529.12 | £5,460.76 | £1,260.17 |
| Take-home pay (net pay) | £57,124.17 | £4,760.35 | £1,098.54 |
By structuring your personal income in this way, the total tax liability on the £80,000 profit generated by the company would be £22,876. This comprises the Corporation Tax liability, employer’s NIC, and personal tax on dividend income.
Taking a gross salary of £80,000 and no dividends
If you were to take the full £80,000 as a director’s salary rather than a combination of salary and dividends, the entire salary would be a tax-deductible expense for the company.
The personal tax liability on your income would be £23,042.60, which comprises:
- Personal Allowance of 0% on the first £12,570 = £0.00
- Income Tax @ 20% on £37,700 = £7,540
- Income Tax @ 40% on the remaining £29,730 = £11,892
- Class 1 employee National Insurance contributions (@ 8% on salary between £12,570 and £50,270, then 2% on the remaining salary) = £3,610.60
This would leave you with a take-home pay of £56,957.40
The company would also have an employer’s NIC bill of £9,784.20. Consequently, the total tax liability of your £80,000 salary would be £32,826.80
Compared to the total tax liability due on the salary and dividend structure, you’d pay an extra £9,950.80 in tax by taking all company profits as a salary.
Do I need to operate PAYE to receive a director’s salary?
To pay directors’ and employees’ salaries, most companies need to register as employers with HMRC and operate Paye As You Earn (PAYE) within their payroll. This will be necessary if you or any of your employees:
- are paid £123 or more per week
- receive expenses and company benefits
- are receiving a pension
- have another job
- received Jobseeker’s Allowance, Employment and Support Allowance, or Incapacity Benefit
If you need to pay any Income Tax or National Insurance on your salary, your payroll software will work out the liability and make the necessary deductions through PAYE.
- A guide to PAYE for company owners
The company will be required to report your pay and deductions to HMRC on or before each payday and then make the necessary payments, usually each month. If your company can claim Employment Allowance, you will also claim it through PAYE.
How and when do I pay tax on dividends?
Unlike salaries, dividends are not paid and taxed through PAYE. Instead, you will be responsible for separately declaring your dividend income to HMRC.
To do so, you must register for Self Assessment, file a Self Assessment tax return after the end of the tax year, and pay any tax that you owe on these earnings directly to HMRC.
The deadline for filing a tax return and paying dividend tax is 31 January, following the end of the tax year in which you receive the dividend income. For example, the deadline for dividends received in the 2024-25 tax year is 31 January 2026.
- Do I need to register for Self Assessment if I run a Ltd company?
Since there is a lengthy delay between receiving dividends and paying personal tax on this income, it’s worthwhile setting aside the tax in a high-interest savings account. This presents a good opportunity to make your tax-efficient remuneration work even harder for you.
Alternatively, you could temporarily invest some or all of your Self Assessment tax in National Savings and Investments (NS&I) Premium Bonds. You won’t earn any interest, but you will be automatically entered into a monthly prize draw for a chance to win tax-free cash prizes. You can also withdraw your money at any time, so they are ideal for saving toward your future tax bill.
Thanks for reading
We hope the information in this guide has been helpful and will help you choose the most tax-efficient director’s salary and dividend income structure for the 2024-25 tax year.
That being said, there is a great deal to consider. Paying yourself through a company is far more complex than doing so as a sole trader, so we recommend speaking to an accountant or tax advisor for tailored, professional advice.
Explore our other posts on the 1st Formations Blog for more company guidance and business advice. If you have any questions about this article or any of our services, please comment below or contact our London-based team of company formation experts.
