Most limited company directors pay themselves a small salary and distribute the rest of their company profits as dividends.
As a company director, you set your salary level and decide when to declare company dividends.
In this guide, we reveal the most tax-efficient salary to pay directors during 2024/5.
Optimum salary for company directors in 2024/25 – key considerations
A number of factors influence the optimum salary level to pay yourself as a company director.
Do you have any other sources of income?
Do you have income from a second job or other source of income?
Tax-free personal allowance
The tax-free personal allowance is £12,570. There is no income tax to pay if your salary stays at or below this threshold.
The personal allowance is gradually eroded by £1 for every £2 you earn above £100,000 each tax year.
This means that if you earn £125,140, your entire personal allowance is forfeited.
Employers’ and employees’ national insurance
Your company pays 13.8% Employers’ NICs on salaries above the Secondary Threshold of £175/week (£9,100/year).
The ‘Employment Allowance’ allows eligible businesses to reclaim up to £5,000 in Employers’ NICs. However, company directors who receive small salaries will not benefit unless they earn £9,100 or more.
You cannot claim the EA as a sole director, with no other employees.
As a company employee, you pay 8% Employees’ NICs on wages in excess of the Primary Threshold (PT) and 2% on income above £50,270 per year.
You can check the 2024/5 NIC rates and thresholds here.
Entitlement to the State Pension
Check with The Pension Service to see if the level of NICs you pay will affect your state pension. If you pay yourself too low a salary, this may affect your pension entitlement.
If you have a contract of employment with your company (however unlikely this may be), you must pay yourself the National Minimum Wage, £11.44 per hour for adults aged 23 or over.
Pension contributions
You should also check with your accountant if a minimum salary is required if you contribute to a personal or executive pension scheme.
Are you caught by IR35?
This article assumes that your contract work is not caught by IR35.
Any income caught by IR35 is taxed as a deemed salary, subject to employment taxes.
What is a tax-efficient director’s salary in 2024/25?
Your optimum salary for the year is determined by the current tax rates and bands and whether your company can claim the Employment Allowance (EA).
This incentive cancels out the employers’ NIC liability of eligible businesses to encourage them to take on staff.
The rules changed in April 2016, so you cannot claim it if you are the sole director of a company (with no other employees).
Corporation Tax also increased from April 2023:
The first £50,000 of profits are still taxed at 19%.
Profits between £50,000 and £250,000 are taxed at 26.5%.
Profits over £250,000 are taxed at 25%.
As a result, any Corporation Tax savings mentioned below will be higher if your profits are above £50,000 for the tax year. In these examples, we assume your company pays CT at 19%.
a) £9,100 (tax efficient, hassle-free)
For the 2024/5 tax year, if you pay a £9,100 director’s salary, you pay no income tax or Employees’ National Insurance. Your company doesn’t pay Employers’ NICs on wages below this Secondary Threshold.
£9,100 is a tax-efficient salary if your company cannot claim the EA. No NIC or Income Tax is payable.
This is a hassle-free and tax-efficient salary for single-director companies. However, £12,570 is slightly more tax-efficient but involves more administration (see below).
b) £12,570 (optimum for single-director companies)
If you pay a director’s salary of £12,570, there is no income tax or Employee’s NI liability. The company pays some Employers’ NI on a salary above the £9,100 Secondary Threshold.
The company pays an extra £478.86 in Employers’ NICs, but saves an extra £750.28 in Corporation Tax compared to the £9,100 salary level. This means that the company is £271.41 better off.
This is the most tax-efficient salary for single-director companies. However, you may prefer the simplicity of the lower £9,100 salary, which does not have taxes to account for by either the company or the director.
c) £12,570 (if the company can claim the Employment Allowance)
If your company can claim the EA and pay each director/employee a salary of £12,570, there is no income tax to pay (as this is the same amount as the personal allowance).
Ordinarily, the company would have to pay Employers’ NICs of £478.86.
However, the Employers’ NIC element is cancelled out by the Employment Allowance.
Also, by taking a £12,570 salary, the company saves £659.30 in additional Corporation Tax compared to the £9,100 salary level (per employee).
So, £12,570 is the most tax-efficient director’s salary for the 2024/25 tax year if you can claim the EA.
The company is better off by £659.30 per employee.
What was the most tax-efficient director’s salary in 2023/4?
The optimum salary for 2023/4 was the same as 2024/5 – £12,570.
Further Considerations
It is best to work out your overall projected income for the tax year in terms of salary and dividends.
Before you distribute dividends, your company must have sufficient retained profits. Otherwise, your dividend declaration could be illegal.
You should discuss your overall remuneration strategy with your accountant before relying on the information in this article.
