To minimize tax liabilities for the 2024-25 tax year, it is generally most tax-efficient for company directors to take a combination of a low director’s salary and regular dividend payments, rather than taking all income as salary. Here’s a breakdown of how to optimize this structure:
Director’s Salary
Lower Earnings Limit (LEL): The absolute minimum salary to protect State Pension and benefits is £6,396 per year. Neither you nor your company will pay National Insurance on this income, and you won’t pay income tax.
Secondary Threshold: A salary of up to £9,100 avoids both Income Tax and Class 1 employee National Insurance contributions. Additionally, the company will not pay employer’s National Insurance.
Primary Threshold: If your company can claim the Employment Allowance, it may be more efficient to take a salary up to £12,570 which is the NIC Primary Threshold and Personal Allowance limit, meaning no income tax is paid on the salary. The company will have to pay 13.8% secondary contributions on the salary between £9,100 and £12,570, but the Employment Allowance can reduce the company’s liability by up to £5,000. However, not all companies are eligible for the Employment Allowance.
Note: Unless you intend to take all of your personal income as a salary, you should choose one of these salary options.
Dividend Payments
Taxation: Dividends are subject to lower rates of dividend tax based on income tax bands. No National Insurance is payable on dividend income.
Dividend Allowance: The 0% dividend allowance for 2024-25 is £500.
Tax Bands: Above the £500 allowance, dividends will be taxed at the following rates based on the individual’s income tax band:
- 8.75% for income between £13,070 and £50,270
- 33.75% for income between £50,271 and £125,140
- 39.35% for income above £125,140
Tax-Free Amount: A person can take up to £13,070 in dividends free from personal tax in 2024-25 if they do not have other sources of income. This is comprised of the £12,570 Personal Allowance and the £500 Dividend Allowance.
Corporation Tax: Dividends are paid from company profits after tax. Corporation Tax is deducted from profits before determining the amount available for dividends. The lower rates of personal tax on dividend income are meant to account for the tax already paid on company profits.
Tax Efficiency: While dividend payments cannot be claimed as a business expense, the lower dividend tax rates and National Insurance savings usually make up for this.
Combined Salary and Dividends vs. All Salary
Tax Savings: Combining a director’s salary and dividends usually results in less overall tax than taking all income as a salary. The tax and National Insurance savings are greater for higher-rate or additional-rate taxpayers.
Example: Taking a salary of £9,100 and £41,161.50 in dividends results in a total tax liability of £12,993 for a company with profits of £60,000, whereas taking the full £60,000 as salary results in a total tax liability of £21,666.80. Similarly, for a company with profits of £80,000, taking a salary of £12,570 and £52,959.12 in dividends results in a tax liability of £22,876, while taking the full £80,000 as salary would result in a tax liability of £32,826.80.
Additional Factors
Staying in a Lower Tax Bracket: Some company owners limit their total annual income to remain within the basic income tax band. This is a personal choice that depends on circumstances, needs, and long-term business goals.
PAYE and Self Assessment
PAYE: To receive a director’s salary, most companies need to register as an employer and operate PAYE. If you need to pay Income Tax or National Insurance, it is deducted through PAYE.
Self Assessment: Dividends are not paid through PAYE. Instead, individuals must register for Self Assessment, file a tax return after the end of the tax year, and pay the tax owed.
It’s recommended to seek professional advice from an accountant for tailored tax planning.