As a limited company director, you have more control and flexibility over how you pay yourself compared to employees. However, choosing the most tax-efficient method is crucial to maximising your income while keeping taxes low.
This guide covers:
✅ Salary vs. Dividends – Which is better?
✅ How to reduce tax & National Insurance Contributions (NICs)
✅ Director’s Loan Account – When can you use it?
✅ Best tax strategies for 2024/25
Let’s explore the best way to pay yourself legally and efficiently. 🚀
Salary vs. Dividends – How Should You Pay Yourself?
Most limited company directors pay themselves through a combination of:
1️⃣ A salary (processed via PAYE)
2️⃣ Dividends (paid from company profits)
Each method has its own tax implications, so getting the right balance is key.
Option 1 – Paying Yourself a Salary
A salary is an amount paid regularly via PAYE (Pay As You Earn), just like an employee’s wages.
✅ Advantages of a Salary:
✔ Qualifies for State Pension & other benefits
✔ Can be tax-free if below the Personal Allowance (£12,570)
✔ Reduces Corporation Tax as it's a deductible expense
❌ Disadvantages of a Salary:
🚫 Salaries incur Income Tax & National Insurance Contributions (NICs)
🚫 Your company must run payroll (PAYE)
💡 Tax-Efficient Salary for 2024/25:
Most directors minimise NICs by setting their salary at:
- £12,570 per year (tax-free up to the Personal Allowance)
- £9,100 per year (to avoid Employee NICs entirely)
📌 Important: If your salary exceeds £12,570, you’ll start paying 20% Income Tax and NICs.
Option 2 – Paying Yourself via Dividends
Dividends are payments made from company profits after Corporation Tax (19%) has been deducted.
✅ Advantages of Dividends:
✔ Lower tax rates than salary
✔ No National Insurance Contributions (NICs)
✔ More tax-efficient for higher earners
❌ Disadvantages of Dividends:
🚫 Can only be paid if your company has sufficient profits
🚫 Subject to Dividend Tax (rates depend on income level)
💡 Dividend Tax Rates for 2024/25:
Tax Band Dividend Tax Rate Income Range
Dividend Allowance 0% First £500 (down from £1,000 in 2023/24)
Basic Rate (20%) 8.75% £12,570 – £50,270
Higher Rate (40%) 33.75% £50,271 – £125,140
Additional Rate (45%) 39.35% Over £125,140
🔹 Example: If you take £30,000 in dividends, the tax breakdown would be:
- First £500 tax-free
- £29,500 taxed at 8.75% = £2,581.25 tax due
📌 Key Strategy: Many directors take a small salary (below NICs threshold) + dividends to minimise tax liability.
Director’s Loan Account – Another Way to Take Money from Your Company
A Director’s Loan allows you to borrow money from your company, but there are tax implications:
✔ Tax-free if repaid within 9 months
✔ Interest-free borrowing for short-term needs
🚨 Tax Warning:
- If not repaid within 9 months, your company pays 33.75% Corporation Tax on the loan.
- If the loan exceeds £10,000, you must pay Benefit in Kind tax & report it on a Self Assessment return.
💡 Best Practice: Only use Director’s Loans for short-term cash flow needs and repay them on time to avoid penalties.
Best Tax Strategies for Paying Yourself in 2024/25
To maximise tax efficiency, most directors combine salary & dividends strategically:
📌 Optimal Payment Structure:
✅ Take a salary of £9,100 (avoids NICs but still qualifies for State Pension)
✅ Withdraw dividends up to £50,270 (staying within the Basic Rate Tax Band)
✅ Use tax-efficient allowances (e.g., pension contributions)
Frequently Asked Questions (FAQs)
1. Should I pay myself only in dividends?
🚨 No. Dividends don’t count towards State Pension eligibility, and your company must generate profits to pay them. A small salary + dividends strategy is usually best.
2. How much tax will I pay on £50,000 as a director?
If you take £12,570 salary + £37,430 dividends:
- £12,570 salary (tax-free)
- £500 dividend tax-free
- £36,930 dividends taxed at 8.75% = £3,230 tax due
✅ Total tax bill: £3,230 (just 6.5% of £50,000)
3. Can I pay myself a tax-free salary?
Yes! A salary of £9,100 stays below the NIC threshold, keeping it completely tax-free.
4. What happens if my company makes no profit?
If your company has no profit, you can’t pay dividends. You may need to increase your salary, which is less tax-efficient.
5. Can I put money into my pension instead of taking a salary?
Yes! Pension contributions reduce Corporation Tax and are tax-efficient for directors who want to save for retirement.
Key Takeaways – How Should Directors Pay Themselves?
✅ Salary + Dividends Strategy is the most tax-efficient method
✅ Take a salary of £9,100 to avoid NICs but qualify for State Pension
✅ Pay dividends up to £50,270 to stay in the basic rate tax band
✅ Use Director’s Loans cautiously (must be repaid within 9 months)
✅ Consider pension contributions for extra tax savings
By structuring your income tax-efficiently, you can reduce tax, increase take-home pay, and stay compliant with HMRC rules.
Need Help Managing Your Director’s Pay?
If you’re unsure how to optimise your salary & dividends, consider:
📞 Speaking to an accountant for a tailored tax plan
💻 Using online payroll & accounting software for automation
📝 Checking HMRC guidelines for the latest tax rules
Taking control of your income now ensures a financially stable future! 🚀