Efficient Director’s Salary for 2024/25
The most tax-efficient way to draw an income from your own limited company in the UK often involves a low salary and dividend payments. This strategy is aimed at minimising the amount of tax that you have to pay by taking advantage of lower tax rates on dividends compared to salaries as well as leveraging any tax free allowances available.
National Insurance
Employers and Employees pay National Insurance on salary, but not on dividends which is why only a small salary is allocated with the remainder being dividends.
Salaries below the Lower Earnings Limit (LEL) (for 2024/2025 £6,396) do not incur NI or accrue NI benefits such as qualifying payments towards a State Pension. A salary above the LEL but below the Primary Threshold will not incur National Insurance but will allow qualifying years to build up to put towards NI benefits such as State Pension.
For employees, National Insurance will be calculated on a salary over the Primary Threshold (for 2024/2025 £12,570).
For employers, National Insurance will be calculated on a salary over the Secondary Threshold (for 2024/2025 £9,100).
Personal Allowance
A personal allowance is the amount you are allowed to earn before you have to start paying income tax. For 2024/2025 the allowance is £12,570 meaning that you only begin to pay tax on the income that goes above this allowance.
The rates at which you will pay tax on the income will depend on the type of income and the income rate bands.
A summary of the rates and rate bands on individual income types can be found here.
Employment Allowance
Eligible employers can claim the Employment Allowance (for 2024/2025 up to £5,000) against their employers National Insurance liability.
To be eligible, employers must have at least 1 employee or 2 directors on the payroll. The directors can only claim the allowance from one company if they are involved in more than one.
Corporation Tax
A limited company will pay corporation tax on its taxable profits. Salaries are an allowable expense and so salary along with any employers national insurance will reduce the corporation tax liability.
Strategy
The most tax-efficient salary for a limited company director depends on if you are the sole director and employee, or if the business has multiple employees.
Below is a general strategy for how this might be approached, bearing in mind that specifics can vary depending on your personal circumstances and tax legislations at the time.
Sole Director
The most tax-efficient salary is £12,570 which will incur National Insurance liabilities but will be offset against the corporation tax relief. The National Insurance will be payable in line with each RTI pay period however you may be eligible to pay this quarterly.
As an alternative, £9,100 could be taken as a salary which would incur no National Insurance liabilities and reduces the burden of making regular payments to HMRC.
Multi-Employee
The most tax-efficient salary is £12,570 which will incur National Insurance liabilities but will be offset against the corporation tax relief. The National Insurance will be payable in line with each RTI pay period.
If the company qualifies for the employment allowance then there will be more in savings.