Introduction
When running a limited company, every penny counts, so understanding how to efficiently pay yourself is key.
Let’s explore the most tax-efficient methods for company directors to pay themselves.
The basics
There are broadly three main options when it comes to paying yourself as a director of a limited company, salary, dividends and reimbursing yourself for expenses.
For tax efficiency, most company directors will choose to pay themselves a low salary and take any further money from the company in the form of dividends. This is because dividends are taxed at a lower rate than salary, and avoid national insurance contributions.
Any expenses can then be repaid by the company free from tax and national insurance. For maximum tax efficiency you may also want to consider maximising company benefits and pension contributions.
Let’s dive in to show you how it works.
Paying yourself a salary (PAYE)
A salary is what you pay yourself through payroll as is subject to PAYE tax. As salaries are tax deductible they help to lower the company’s taxable profit, and therefore the tax the company pays.
For tax efficiency you’ll want to pay yourself below the personal tax allowance of £12,570, as any salary you earn over £12,570 is then taxed at the following Income Tax rates.
Tax Bands
| Tax Band | Total Earnings | Income Tax Rate |
|---|---|---|
| Personal allowance | Up-to £12,570 | 0% |
| Basic Rate | Over £12,570 to £50,270 | 20% |
| Higher Rate | Over £50,570 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
National insurance
Salaries are also subject to National Insurance Contributions (NICs) from both the employee & employer. This makes a big difference.
On your director’s salary, you will personally pay 12% NIC on earnings between £12,570/year and £50,270/year. Additionally, your company will pay 13.8% NIC on salaries over £9,100 per year.
Therefore it’s generally optimal to set yourself a salary of £9,100 annually. This ensures no income tax, employer or employee national insurance contributions, yet you still maintain eligibility for state pension benefits. A huge tax win all round!
Exceptions to the rule:
There are exceptions to the rule, which you should be aware of before paying yourself £9,100 a year, as you may have already used some or all of your tax free allowance up.
For example, if you have already earned (or expect to receive taxable income) over £12,570 in the coming fiscal year - it will not be tax efficient to also pay yourself through payroll.
This is very common if you:
- Have multiple limited companies
- Have a job as well as run your limited company
- Have just transitioned from being a sole-trader to opening a limited company
- Own a rental property in your own name
- Make income from trading shares (not within an ISA or SIPP)
- Earn significant income from other investments (including taxable interest and dividends)
If you fall into any of these 6 categories, you should consult your accountant before paying yourself through payroll.If you're a Mighty customer you can do so for free through support in the platform.
Dividends
Once you’ve paid yourself up-to £9,100 of payroll or exhausted your tax free allowance, it’s generally most tax efficient to pay yourself any further money through dividends
Dividends are payments made by a company from its profits to its shareholders after it has accounted for all upcoming expenses and liabilities.
In the 2023/24 tax year the first £1000 of dividends you receive are tax free. Thereafter all dividends will be taxed according to the percentages in the tax below.
Comparing Tax Bands
| Tax Band | Range | Income Tax Rate | Dividend Tax Rate |
|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | 0% |
| Basic Rate | Over £12,570 to £50,270 | 20% | 8.75% |
| Higher Rate | Over £50,570 to £125,140 | 40% | 33.75% |
| Additional Rate | Over £125,140 | 45% | 39.35% |
