As a limited company director, you have various options for how to pay yourself, each with its own tax implications and benefits.
The key methods include taking a salary, paying yourself dividends, adding a shareholder or employee, reimbursing expenses, contributing to a pension, and using director loans.
In this blog, we’ll cover each of these strategies in detail, explaining how they work, how they're taxed, and when they might be most beneficial for you.
1. Paying Yourself a Salary
As a director, you have the flexibility to determine the salary you pay yourself, but it’s crucial to structure it wisely to minimise taxes. Your salary is considered an allowable business expense, meaning it reduces your company's profits and, therefore, your corporation tax liability. Salary Thresholds for 2024/25 Tax Year There are three main salary thresholds you should be aware of for the 2024/25 tax year:
- Lower Earnings Limit (£6,396): At this level, no tax or National Insurance (NI) is payable, but you still qualify for certain state benefits, including your state pension.
- Secondary Threshold (£9,100): Here, you won’t pay employee NI or income tax, but you will start to incur a small amount of employer's NI.
- Primary Threshold (£12,570): This is the personal allowance for the tax year. If you set your salary at this level, you won’t pay income tax or employee’s NI, but you will incur a small amount of employer’s NI.
Salary Example Let’s look at how this works in practice: - A salary of £6,396 gives you a monthly take-home pay of £533 with no tax or NI deductions. - A salary of £12,570 results in a monthly take-home pay of £1,047.50, still with no income tax or employee’s NI, but with a small employer’s NI contribution. We typically recommend that directors pay themselves a salary up to the primary threshold to maximise tax efficiency.
2. Paying Yourself Dividends
Dividends are another popular way to pay yourself as a company director. Dividends are drawn from post-corporation tax profits and are subject to different tax rates than regular income. Dividend Tax Rates for 2024/25 Tax Year
- Tax-Free Dividend Allowance: £500
- Basic Rate (£12,571 to £50,270): 8.75%
- Higher Rate (from £50,271 to £125,140): 33.75%
- Additional Rate (above £125,140): 39.35%
It's important to note that dividends are paid in addition to your salary and are declared on your self-assessment tax return. Dividend Example For instance, if your salary is £12,570 and you declare dividends of £37,700, the tax would break down as follows: - First £500 is tax-free. - £37,200 is taxed at 8.75%, resulting in a tax liability of £3,255. This keeps you within the basic rate of tax, making dividends a highly efficient way to supplement your income.
3. Adding an Employee
If your company requires help from someone else, like an admin assistant or bookkeeper, you can add them as an employee. Any salary paid to an employee is considered a business expense and reduces your company’s taxable profit. If the employee earns over £10,000 per year, they must be automatically enrolled in a workplace pension scheme, although they can opt out. It’s essential to ensure that their salary reflects the work being done, to avoid scrutiny from HMRC.
4. Adding a Shareholder
You can add a spouse as a shareholder therefore splitting the dividend income according to the share ratio. However, be cautious about meeting HMRC’s spousal exemption criteria, which ensures the additional shareholder has full rights over the dividends and isn’t simply rerouting income back to you. We recommend you discuss this with your Personal Accountant before taking any action.
5. Reimbursement of Expenses Paid Personally
If you’ve paid for business expenses out of your own pocket, you can reimburse yourself from the company. Some common reimbursable expenses include: Accommodation: Hotel stays for business purposes.
- Travel: Train tickets or airfares.
- Subsistence: Meals purchased while on business trips.
- Mileage: 45p per mile for the first 10,000 miles, and 25p thereafter.
- IT costs: Hardware, software, or subscriptions necessary for your work.
These expenses reduce your company’s profit, which in turn reduces your corporation tax. Always keep receipts and clear documentation to support your claims but also take a closer look at our expense guides to see some of the rules around Travel, Accommodation and Subsistence.
5. Paying Into a Pension
Contributing to a pension is another tax-efficient way to take money out of your company. You can pay up to £60,000 per year into a pension through employer contributions, which will reduce your company’s profits (and thus your corporation tax). You can also carry forward any unused allowance from the previous three years, as long as you’ve had a pension plan in place during that time. However, contributions over the £60,000 annual allowance may be subject to a tax charge. Always consult a financial advisor before setting up a pension scheme.
6. Director Loans
A director’s loan allows you to borrow money from your company, but it must be repaid within nine months of your year-end to avoid additional tax charges. Tax-Free Loan Allowance You can borrow up to £10,000 from your company without having to pay any interest. However, if you borrow more than £10,000, you will need to declare it on your P11D form, and you may be liable for Class 1A National Insurance, or you could charge interest at HMRC's official rate (currently 2.5%). Repayment If the loan is not repaid within nine months, your company will have to pay tax at a rate of 33.75% on the outstanding balance. This tax is refundable once the loan is repaid, but it’s a costly option if you’re not able to pay the loan back on time.
Summary
When paying yourself as a limited company director, you have several options, each with its own tax implications. By carefully balancing your salary, dividends, pensions, expenses, and potentially director loans, you can extract income from your business in the most tax-efficient manner possible. By understanding how each method works and its implications, you’ll be in a better position to make informed decisions about your compensation and how to manage your company’s finances effectively. As always, our specialist contractor accountancy team is here to provide tailored advice and guidance to help you make the right decisions. Please get in touch.