What’s the Most Tax Efficient Director’s Salary in 2024/25? | The Accountancy Partnership (2024)

As a director you’re legally separate from your limited company, even if you’re also the owner. This means that you’re not allowed to simply keep the profits for yourself in the same way that a sole trader can.

Instead, you’ll need to decide how much to pay yourself. The most tax-efficient way to take an income from your own limited company is normally through a combination of a low salary (in the same way as any other employee) and dividend payments. In this article we’ll go over:

Taking a salary and dividends

National Insurance and what it means for directors

Employer and employee National Insurance thresholds and rates

Optimal salary for sole directors

Tax efficient salaries for two or more directors

Taking a salary and dividends

If you’re a director, you’re technically an employee of your own limited company. This is an important point, because it means you’re both an employee and an employer – of yourself! But why does it matter?

Employers and employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends. In that respect it might make sense to pay yourself a smaller salary and make up for it with dividend payments.

But the good thing about taking a salary is that it means you have regular income throughout the year which, because directors are ‘office holders’, can be below minimum wage without breaking any rules.

So how much should you pay yourself from your own company? Paying yourself as a company director is actually a bit of a balancing act in order to be as tax efficient as possible. To get the balance right it’s useful to consider:

• National Insurance contributions as both an employee and as an employer, as well as the benefits of making qualifying payments for the State Pension
• How many people there are in the business
• Tax allowances for dividends
• Income tax allowances
• Tax relief for employee salaries

Sit tight, and we’ll talk you through director’s salaries, and what the optimum amount to pay yourself is. We know it can be confusing, so get an instant quote online if you need more help!
‌

What does National Insurance mean for director’s salaries?

The thresholds for paying employer’s and employee’s NI are at different levels, so this has an impact on the amount of salary that you take.

If you take a salary from the business and it’s higher than the National Insurance threshold (the point at which you start paying National Insurance) for both employers and employees:

• Primary Threshold: You, as the employee, will start paying National Insurance on the salary that your company pays you
• Secondary Threshold: Your company, as your employer, will start making employer’s National Insurance Contributions on your earnings

It basically means you’re paying National Insurance twice on the same money – which isn’t very tax efficient at all!

The National Insurance thresholds for the 2023/24 and 2024/25 tax years are shown in our table below for both employers and employees. The threshold for employers to start paying National Insurance is actually lower, so they start paying NI before employees do. You can also view these figures in our tax rates article.

What are the employer and employee National Insurance thresholds and rates?

This table can seem a bit confusing because the Secondary Threshold (when employers start paying NI) is actually lower than the Primary Threshold (when employees start paying NI). We’re including this because it shows where each threshold starts and ends, which is useful when it comes to working out the optimal director’s salary.

Optimising your director’s salary to qualify for the State Pension

Taking a salary which is higher than the Lower Earnings Limit (£6,396 per year in 2024/25) allows directors to build up qualifying years for their State Pension.

If your salary is above the Lower Earnings Limit but below the Primary Threshold (£12,570 for the 2024/25 tax year) then you’ll accrue all the benefits of National Insurance, without actually paying it. This will affect how much State Pension you are entitled to once you pass state retirement age.

Can I use the tax-free Personal Allowance on my director’s salary?

Yes, you can. The Personal Allowance is the amount you are allowed to earn before you have to start paying income tax. In 2024/25 the allowance is £12,570, so you only pay tax on the part of your income which is above that threshold amount.

Paying tax on dividends

It’s worth noting that although they’re not subject to National Insurance, dividends are subject to tax, but at a different rate to normal income tax.

The good news is that there is also a separate dividend tax allowance that you can use on top of the Personal Allowance. Unfortunately the threshold to start paying dividend tax is reducing, so you’ll start paying it on more of your dividend income.

Are salaries an allowable expense for Corporation Tax?

A limited company pays Corporation Tax on the profit that it makes throughout the year. Claiming tax relief on allowable expenses reduces the amount of profit, therefore reducing the amount of Corporation Tax which the company pays.

Salaries are an allowable expense, so if you’re a company director then paying yourself a salary from the business can help you lower your Corporation Tax bill.

How does the National Insurance Employment Allowance affect director’s pay?

Thanks to the Employment Allowance, the optimum salary for a company director also depends on how many other people there are in the business.

In 2024/25 eligible employers can use the Employment Allowance to claim up to £5,000 in order to cover the costs of employer’s National Insurance.

To be eligible, employers must have at least 1 employee or 2 directors on the payroll, and the directors must not have another company that is claiming the Employment Allowance already.

This means that sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.

2024/25 Director’s salaries – How much should I pay myself from my limited company?

Considering all the taxes and allowances together, the most tax-efficient salary for a limited company director depends on whether you’re a sole director, or there are more people in the business.

What is the best company salary for sole directors in 2024/25?

The most efficient salary for sole directors is a bit more complicated because you can’t claim the Employment Allowance if you’re the only person in the business.

The optimum salary that you take depends on your circ*mstances, but as a very broad guide you have two options, each with their own considerations. You might pay yourself a director’s salary of £12,570, or you could go with the lower amount of £9,100.

Taking a salary of £12,570 (£1,047.50 per month)

A sole director taking a salary at this level will incur National Insurance on their wages, but this is offset against the tax relief they can claim against Corporation Tax.

• As a sole director you won’t be able to claim the £5,000 Employment Allowance. Taking a salary above the Secondary Threshold like this means that you’ll need to pay Employer NI contributions. It works out at about £478.86 for the year.
• Because this is less than £1,500 of employer’s NI per month, the company could choose to pay its contributions to HMRC on a quarterly basis, even if you receive a monthly salary.
• Although the company will incur employer’s NI, it will also be able to claim tax relief for your salary, which will reduce your Corporation Tax bill. This reduction is more than the employer’s NI that your company will need to pay on this salary, so will effectively cancel it out.
• This salary is at the Primary Threshold, so you won’t need to pay NI as an employee.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is at the tax-free Personal Allowance threshold for income tax
• Taking a higher salary might affect your company’s cash flow throughout the year (and will leave a bit less in the pot for dividends)
• It might also mean that your accountant or payroll provider charges you a slightly higher fee.

Take a salary of £9,100 (£758.33 a month)

Taking a slightly lower salary as a sole director can mean there’s more money left for dividends at the end of the year.

• As a sole director you can’t claim the Employment Allowance, but this salary is at the Secondary Threshold, so your company won’t need to pay employer’s NI on it anyway
• This is less than £1,500 of employer’s NI per month, so your company could choose to pay its contributions to HMRC on a quarterly basis, even if you receive a monthly salary.
• The company can claim tax relief against your salary, which will help to reduce its Corporation Tax bill
• This salary is lower than the Primary Threshold, so you won’t need to pay employee’s NI.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is less than the tax-free Personal Allowance threshold

What is the most tax efficient salary for two or more directors in 2024/25?

Having at least one employee, or 2 or more directors, on the company payroll means that you’re eligible to claim the Employment Allowance, so you can take a higher salary and still be tax efficient.

This is because two or more directors can take an annual salary up to the Primary Threshold without needing to pay employee’s National Insurance, and then claim the £5,000 Employment Allowance to cover the portion of employer’s National Insurance they would otherwise incur.

What if I have another source of income?

The optimum amount for director’s payroll takes advantage of the Personal Allowance (£12,570). If you are already using it up because you have other income from elsewhere, then director’s payroll becomes PAYE payroll, and subject to tax and NI as normal.

What happens if I start a company but don’t take a director’s salary straight away?

If you register a limited company but wait a few months before taking a wage, you can backdate your optimum salary to the incorporation date and still remain tax efficient as long as you’re still in the same financial year.

If a director joins the business later on, the National Insurance threshold is pro-rated from the date that the director is appointed, regardless of when the salaries actually start being paid.

This means you can pro-rate the salary based on when the director started, rather than when payroll was set up, or when the company was incorporated.

Find out more about our online accounting services for directors and limited companies. Call 020 3355 4047, or get an instant online quote.