As a director of a UK limited company, understanding the most tax-efficient way to pay yourself is essential. There are two main options: taking a salary and/or drawing dividends. Each has its benefits and own tax implications. 

Here’s a breakdown to help you make an informed decision. 

1. Paying Yourself Through Salary 

A salary is the income you receive as an employee of your own company. Salaries are subject to Income Tax and National Insurance Contributions (NICs) just like any other employment income. 

Income Tax: Salaries are taxed based on the UK’s progressive income tax rates. For the 2024/25 tax year, rates start at 20% for income over £12,570, rising to 40% and 45% at higher income thresholds. 

National Insurance: Directors pay Class 1 NICs on salaries, but it’s possible to set your salary just below the National Insurance Primary Threshold (currently £12,570 annually) to avoid NICs, while still qualifying for state benefits like pensions. 

Corporation Tax Deductible: Salaries are considered an expense for the company, reducing your Corporation Tax liability (currently 19%-25% for companies). 

This option provides regular income and state benefits eligibility, but tax and NICs can make it costly at higher amounts. 

2. Paying Yourself Through Dividends 

Dividends are payments made to shareholders from a company’s post-tax profits. Since they come from profits, they do not reduce the company’s Corporation Tax liability. However, dividends are typically taxed at a lower rate than salary income: 

Dividend Tax Rates: As of 2024/25, the rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers, making dividends more tax-efficient than salaries at higher income levels. 

Dividend Allowance: The first £500 of dividend income is tax-free, providing additional savings. 

Flexibility: Unlike salaries, dividends can be paid at any time, allowing directors to time payments in line with tax planning strategies. 

However, dividends can only be paid from profits, so if your company isn’t profitable, this may not be a feasible option. 

Combining Salary and Dividends 

For many directors, a combination of salary and dividends offers the best of both worlds. By paying yourself a modest salary—below the NIC threshold—and topping up with dividends, you can reduce your tax and NIC burden while retaining state benefit entitlements. 

Final Considerations 

Tax planning for directors can be complex, and the best approach depends on your financial goals, profitability, and income requirements. Seeking advice from an accountant or tax advisor is highly recommended to ensure compliance with HMRC rules and to optimise your income strategy.

By understanding the tax implications of each payment method, you can make informed decisions that benefit both you and your company.

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