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

As a limited company director in the UK, the best way to pay you is by taking a low director's salary and adding regular dividend payments. This is because allowances and tax thresholds change at the start of every tax year. That's why checking your earnings yearly is beneficial to ensure you pay your taxes efficiently.

This blog will elaborate on the best director's salary and dividend format for the tax year 2024-25, from 6 April 2024 to 5 April 2025. But first, let's clarify the national insurance (NI), income, and dividend tax you need to pay on your personal income based on your earnings in the year.

Payable Tax on Director's Salary and Dividend

If you are a company owner, it's crucial to familiarise yourself with the diverse personal tax that may apply to your limited company's earnings, the current rates, and 2024–25 thresholds.

2024-25, the directors' remuneration will be liable to Income Tax and Class 1 NICs. However, income from dividends falls under lower dividend tax rates according to Income Tax bands and doesn't attract National Insurance charges. Below, we discuss the taxes you will pay on the director's remuneration and any dividends you extract from your company for the period.

The Tax Year 2024-25: Income Tax Rates and Thresholds

All income below this level will be exempted from personal income tax. In England, Scotland, and Northern Ireland, the standard personal tax allowance for the tax year 2024/25 is:

• £242 per week
• £1,048 per month
• £12,570 per year

But if your earnings surpass £100,000 in the year, your Personal Allowance reduces by £1 for every £2, which goes beyond that figure.

In addition to your Personal Allowance, you must pay these income tax rates, which will apply to the directors' salary if you're in England, Northern Ireland, Wales, and Scotland, based on Scottish income tax rates.

National Insurance Rates and Threshold 2024/25

The NI rates and thresholds are similar throughout the UK. The Class employee NI rate for 2024/25 is 8% after a reduction from 10% during the Spring Budget 2024.

That means you must pay 8% Class 1 national insurance contributions on your director's salary, ranging from £12,570 to £50,270. A 2% rate applies to the balance of any earning surpassing that amount. Your business will pay 13.8% of your Class 1 employer national insurance contributions to your salary of over £9,100.

What are the 2024/25 Dividend Tax Rates?

The 2024/25 tax-free dividend allowance was reduced from £1,000 to £500. The dividends you get from your limited company over this amount are subject to these personal tax rates based on the Income Tax band(s) you fall under:

• 8.75% (basic rate): income between £13,070 and £50,270
• 33.75% (higher rate): income between £50,271 and £125,140
• 39.35% (additional rate): income over £125,140

You should combine your annual gross dividend income with other income streams to determine your tax band. This means you may be paying more than one dividend tax rate depending on your tax bracket, which is a higher-rate or additional-rate taxpayer.

Whereas Income Tax is devolved to Scotland, this does not apply to dividend tax. If you are a Scottish taxpayer, the tax levied on dividends follows the above mentioned thresholds.

What's the Tax-efficient Director's Salary in 2024/25?

To identify the optimal director's salary for 2024/25, consider the NIC thresholds for Class 1 and the tax-free Personal Allowance limit. Below are three tax-efficient directors' salary levels that you should consider:

• Pay yourself at least £6,396 a year, which is the NIC Lower Earning Limit
• Take £9,100 salary for the year, which is NIC Secondary Threshold
• Take a salary of £12,570 for the year, which is a Personal Allowance and NIC primary threshold limit

Unless you want to get all your personal income as a salary instead of a mixed dividend income and salary, choose one of the above options.

Let's explore each option separately:

The minimum Lower Earning Limit

To retain your rights to the State Pension and benefits, you must pay the minimum of £6,396 ($8,348) in the 2024-25 tax year, which equates to £533 per month or £123 a week. This is known as the NIC Lower Earnings Limit (LEL).

No Income Tax shall be payable on your payments. Also, on this income, you or your company shall not contribute to Class 1 NI but shall receive the advantages of doing so.

However, if you earn below the LEL from the director's remuneration, you do not get NIC credits unless you pay voluntary National Insurance.

Up to the Secondary Threshold

The Secondary Threshold is the level at which you start paying Class 1 employer's National Insurance (secondary contributions) on your directors' and employees' salaries.

For the tax year 2024/25, the Secondary Threshold is £9,100. This is equivalent to £758 per month or £175 per week.

If you pay up to this amount via PAYE, the director's salary will not be liable for Class 1 employee NICs or Income Tax. In addition, your business will not incur any secondary contributions to your salary.

Up to Primary Threshold (PT)

If your company can claim the Employment Allowance, it will be cheaper to take a director's salary of up to the National Insurance Contribution PT £12,570 per year (£1,048/month, £242/week).

The Primary Threshold is a level below which employees and directors do not pay Class 1 NIC on their earnings. The PT corresponds to the yearly tax-exempt Personal Allowance, so neither your director's salary nor other earnings will be subject to Income Tax.

While your company must contribute 13.8% between £9,100 and £12,570, secondary contributions on your salary income, you may use your Employment Allowance to cut down the company's National Insurance annually to £5,000.

Who is Eligible to Claim Employment Allowance?

You are eligible for Employment Allowance if:

1. You are registered as an employer
2. Are you a company or a non-profit organisation that has a record of its workers
3. Your employers' Class 1 National Insurance contributions are below £100,000 in the previous tax year.
4. You have two or more directors earning over the secondary threshold of Class 1 NICs (if you are a limited company employing directors only).

Your company can't claim employment allowance if:

1. you are the sole director, and you do not have any employees
2. the company has a limited one director or employee with a remuneration over the Secondary Threshold, and only one of them is a director of the company
3. no directors or employees of the company are paid over the Secondary Threshold

There are more eligibility criteria you need to consider. Read the general Employment Allowance guidelines for the UK HMRC to find out if your company qualifies for the Allowance.

How to pay yourself dividends in 2024/25?

Dividends are paid from the company's profits after all taxes are deducted. Hence, Corporation Tax must be deducted from the business profits to determine the possible dividends for distribution. This is why HMRC has lowered the personal tax rates on dividend income; the company has already paid tax on that income.

The dividend income amount you will pay depends on:

1. The amount of distributable profit your business has available (the company profit left after deducting the corporation tax)
2. Whether you are avoiding crossing a line that would take you to the next tax bracket
3. The number of shares you hold in a company (if you own 50% shares, you're entailed to 50% distributable profits)
4. If your annual Personal income surpasses the £12,570 Personal allowance threshold and the £500 dividend allowance, your dividends will be taxed depending on your income tax tier. Remember, you will not pay NI on your dividend income.
5. If you do not earn a director's salary or have income from another source, you can take up to £13,070 of dividends in 2024-25 without personal tax. Any dividend paid exceeding this amount is charged at the earlier highlighted and established dividend tax rates.
6. Although dividend tax is associated with Income Tax bands, the rates are somewhat lower because corporations pay 19% to 25% Corporation Tax on their earnings before distributing dividends to their shareholders.

But you save more tax by taking a director's salary and getting some part of your income in the form of dividends rather than getting the whole of your income as a salary. The NIC and tax savings will apply if you are a higher-rate or an additional-rate taxpayer.

An Effective Way to Structure the Salary and Dividend Income

A director's wages are another business expense treated as a deductible for corporation tax purposes. However, dividends cannot be deducted from business expenses because they are only paid after-tax income. However, the lower dividend tax rates and savings from national insurance contributions sometimes make up for it.

Some company owners prefer to keep their annual income within the basic Income Tax band to escape these high rates. It also depends on the individuals' circumstances, necessities, and long-term business objectives.

Let us discuss how these dividends can be complemented with a tax-efficient director's salary and compare this with taking all potential profits as salary. This will enable you to deduce the total Corporation Tax and, in addition, the total tax for an individual.

Company taxable profits of £60,000 a year

Assuming your business has £60,000 in taxable profits after accounting for the cost of running the company and other expenses but not for your salary.

If you fix the annual director's salary at £9,100 (NIC Secondary Threshold), you can reimburse up to £41,161.50 as dividends. This is the amount of net profit available for distribution as dividends had your salary and Corporation Tax paid.

Here is a table illustrating how this approach would work out, providing a breakdown of the total tax liability:

This way, the £60,000 profit was structured in personal income, and the total tax liability was £12,993. This consists of corporation tax dues and taxes on the shareholders' dividend income.

Paying yourself £60,000 as gross salary and no dividends

If the above £60,000 were to be paid as the director's salary instead of the combination of salary and dividends as above, it means the whole £60,000 is an allowable expense on tax.

The amount of personal tax liability on the salary would be £14,642.60, comprising:

1. No tax on the Personal Allowance at 0% up to £12,570 = £0.00
2. Provisions: = £1,950 Income Tax at 20% on £37,700 = £7,540
3. Tax @ 40% on the further £9,730 = £3,892
4. C1 employee NI contributions, at 8% from £12,570 to £50,270 and 2% above that = £3,210. 60
5. You would then be able to take home £45,357.40 a year
6. It would also have an employer's NIC bill of £7,024.20. Therefore, the total taxes paid on £60,000 salary would be £21,666.80.

Hence, compared to the total tax liability of the salary and dividend structure (adding Corporation Tax to dividend tax), you end up paying an additional £8,673.80 if you pay yourself company profit as salary.

Alternative Ways to Extract Company Profits

There is no single approach that fits everyone, so you might consider the following:

1. Company pension contributions might be the most effective means of repatriating profits because they decrease the company's tax on profits and are not considered a prerequisite in kind.
2. You can avoid paying higher taxes by timing your dividend payment to maintain lower tax brackets. Another idea is to distribute your dividend income for more than one tax year to benefit from personal Allowance and the basic rate band.
3. Check your company's profits and your own tax position a few weeks before the tax year ends. This can help you decide whether to take additional dividends or defer them for the next tax year.

Do I need to pay taxes on dividends?

To pay its directors and employees, a company must register with HMRC as an employer and operate PAYE (Pay As You Earn) on its payroll. You must do this if you or your employees:

1. Earn £123 or more every week
2. Receive pension
3. Receive company benefits and expenses
4. Have another job
5. Receive incapacity benefits, such as Jobseekers Allowance or Employment and Support Allowance.

Employers must notify the HMRC of pay and deductions on or before the payday, typically paying at least monthly. If your business requires the claim of Employment Allowance, you can do so through the Pay As You Earn scheme.

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Final Thought

The best way to reimburse yourself in the 2024/2025 tax year involves a combination of your salary and dividends. The best director salary stands at £9,100 or £12,570 based on the number of employees to be paid and how you prefer it. The rest of the income may also be in the form of dividend income, hence being able to leverage the low tax rates on dividends.