How do Company Directors get Paid? A Complete Beginner's Guide

Ryan Patrick

• 5 min read
How do Company Directors get Paid? A Complete Beginner's Guide

Despite having a passion for business, profit drives many business owners to register limited companies in the UK. However, a limited company is an individual entity whose finances and assets belong to the business. So, how do you reward yourself for the hard work?

Are you new to this and wondering how company directors get paid? Since you and your company are separate individuals, there are procedures for taking money from the business. This guide will break down the steps of paying yourself as a director.

Director's Salary Takes Out

A company director is an employee of a limited company, meaning they receive salary and dividends from the business. So, a company must register with HMRC for PAYE and pay the NIC (employer's national insurance contributions). You must also file income tax deductions with the HMRC from the director's salary quarterly or monthly.

Tax Payable on Director's Salary and Dividends

As a company director, it's advisable to know the types of tax applying to the salary and dividends you receive from your company and the threshold for 2024/25.

Your director salary is subject to Income Tax class 1 NICs. Dividends are taxed at reduced rates according to Income Tax brackets, with no National Insurance contributions applicable to dividend income.

Let's dig into your director's salary and the dividends you will get from your business in the 2024/25 tax year.

Income Tax Rates and Thresholds for the Tax Year 2024/25

The annual tax-free Personal Allowance stands at £12,570, meaning that the initial £12,570 of income is not subject to taxation. However, if your earnings surpass £100,000 during the tax year, your Personal Allowance will decrease by £1 for every £2 earned above this amount.

If you reside in England, Wales, or Northern Ireland, you will pay these Income Tax rates on your director's salary above the Personal Allowance:

  • 20% (basic rate) for income ranging from £12,571 to £50,270
  • 40% (higher rate) for income ranging from £50,271 to £125,140
  • 45% (additional rate) for income exceeding £125,140

However, if you reside in Scotland, you will pay these Scottish Income Tax rates on directors' salaries exceeding the Personal Allowance:

  • 19% (starter rate) for income between £12,570 - £14,876
  • 20% (basic rate) for income between £14,877 - £26,561
  • 21% (intermediate rate) for income between £26,562 - £43,662
  • 42% (higher rate) for income between £43,663 - £75,000
  • 45% (advanced rate) for income between £75,001 - £125,140
  • 48% (top rate) for income over £125,140

National Insurance Rates and Thresholds for the Tax Year 2024/25

National Insurance rates and thresholds remain consistent across the UK. The employee Class 1 National Insurance rate for 2024/25 is 8%, reduced from 10% during the Spring Budget 2024.

If the director's salary exceeds £12,570, you'll incur 8% Class 1 NIC. Your company will also pay 13.8% of the employer's Class 1 NIC on the director's salary income, surpassing £9,100.

2024/2025 Directors Dividend Rates

The 2025/25 tax-free dividend allowance was cut from £1,000 to £500. So, any dividend amount above this will attract these tax rates depending on your income band:

  • 8.75% (basic rate) for income ranging from £13,070 to £50,270
  • 33.75% (higher rate) for income ranging from £50,271 to £125,140
  • 39.35% (additional rate) for income exceeding £125,140

You must add your total dividend income to your other annual income to calculate your tax band. This means you may be subject to multiple dividend tax rates, mainly if you fall into the higher-rate or additional-rate taxpayer categories.

Although Scotland's income tax rates differ, the dividend tax remains unaffected by this distinction. Scottish taxpayers will be taxed on dividends based on the thresholds above.

Tax Efficient 2024/25 Directors' Salary Unveiled

When deciding on the most advantageous director's salary for 2024/25, factoring in the thresholds for Class 1 National Insurance contributions and the annual tax-free Personal Allowance is crucial. You'll have three tax-efficient director's salary alternatives to evaluate.

Here are the options to choose from:

  1. Ensure you receive the NIC Lower Earnings Limit of £6,396 a year.
  2. Opt for a salary up to the NIC Secondary Threshold of £9,100 a year.
  3. Pay yourself up to the NIC Primary Threshold and the Personal Allowance limit of £12,570 a year.

If you're not planning to receive your income as salary only but want to mix salary and dividends, you should pick one of the three choices.

Let's examine each option:

At least a Lower Earnings Limit

To protect your state pension and benefits eligibility, you must provide a minimum of £6,396 in 2024/25. This amount corresponds to the NIC Lower Earnings Limit (LEL) of £533 per month or £123 per week.

With this, you won't pay income tax on your director's salary. Moreover, your company won't pay Class 1 National Insurance on your income, although there are benefits to paying it.

When you earn below the LEL, you don't earn the NIC credits unless you make voluntary contributions.

Until the Secondary Threshold Limit

The employer must pay Class 1 NIC on their director's and employees' earnings at the secondary threshold limit.

In the 2024/25 tax year, the secondary contributions limit is £9,100 (£758/month or £175/week).

If you pay yourself this salary through PAYE, your salary will not be subjected to Class 1 employee national insurance contributions or Income tax. Additionally, your business won't pay a secondary threshold on your salary.

The primary Threshold

If your company qualifies for the Employment Allowance, receiving a director's salary up to the NIC Primary Threshold of £242 per week, £1,048 per month or£12,570 annually might be tax advantageous.

The primary threshold requires directors and employees to pay 8% Class 1 NIC on their salaries. This matches the annual tax-free Personal allowance, meaning you will not incur Income Tax on the director's salary.

Whereas your company will pay a 13.8% secondary threshold on the director's salary, ranging from £9,100 to £12,570, you may use your employment allowance to decrease the business's annual NI liability up to £5,000.

Paying directors dividends 2024/25

You pay dividends from company profits after deducting Corporation Tax. The dividend you pay yourself as a director depends on:

  • The amount of distributable profit available to your company
  • The percentage of your company shares. If you own 100% of shares, you will keep 100% of distributable profits
  • When you're avoiding entering a higher tax bracket

When your annual income from all sources surpasses  £12,570 (Personal Allowance threshold) and £500 (annual tax-free dividend allowance), your Income Tax band(s) will determine tax rates on your dividends.

This implies if you don't receive director's earnings from other sources, you can earn a dividend up to £13,070 tax-free in 2024/25. Any amount exceeding this threshold will be subjected to the dividend tax rates previously mentioned.

Although the dividend tax aligns with Income tax, the rates are lower than income tax rates. Businesses are subjected to Corporation Tax rates ranging from 19% to 25% on their profits before distributing dividends to shareholders.

Additionally, a blend of a director's salary and dividends will result in lower overall tax payments than solely receiving income as a salary. The NIC and tax savings will be greater, especially if you fall into additional rate taxpayer or higher rate categories.

Do I Operate PAYE to get the Director's Salary?

To pay yourself a director and employees' salaries, your company must register as an employer with HMRC and operate PAYE in their payroll.

This will be required if you or any of your staff:

  • Receive £123 per week or more
  • Receiving expenses and company benefits
  • Receiving pension
  • Have another job

Receiving allowances such as employment and support allowance, jobseekers allowance, or incapacity benefit.

Winding Up

Understanding how company directors get paid is necessary before incorporating a company in the UK. It involves navigating various tax thresholds and allowances. If you consider combining directors' salaries and dividends, instead of relying on directors' wages, only you can optimise your income while minimising tax liabilities. It's crucial to adhere to HMRC regulations and operate PAYE if necessary. Striking the right balance between salary and dividends ensures both personal and company finances remain efficient and compliant. Do you have any questions on how company directors get paid? Kindly contact Incorpuk here.