Most tax-efficient director’s salary and dividends for 2024/25 (2024)

Typically, the best way to pay yourself through a limited company is to take a low director’s salary and then top up your earnings with regular dividend payments. Since tax thresholds and allowances (and sometimes rates) usually change at the start of each new tax year, it’s important to review your remuneration annually to ensure that you’re paying yourself in the most tax-efficient manner.

In this post, we explain the optimal director’s salary and dividend structure for the 2024/25 tax year, which runs from 6 April 2024 until 5 April 2025. But before we dive into that, we will clarify the Income Tax, National Insurance, and dividend tax you may have to pay on your personal income, depending on how much you earn in the year.

Tax payable on your director’s salary and dividends

As a company owner, it’s worth familiarising yourself with the different types of personal tax that may apply to the income you receive from your limited company, as well as the current rates and thresholds for 2024/25.

Directors’ salaries are subject to Income Tax and Class 1 National Insurance contributions (NICs). Dividends are subject to lower rates of dividend tax based on Income Tax bands. No National Insurance is payable on dividend income.

Let’s take a look at what you will pay on the director’s salary and dividends you receive from your company in the 2024/25 tax year.

Income Tax rates and thresholds for 2024/25

The annual tax-free Personal Allowance is £12,570. This means that your first £12,570 of income will be tax-free. However, if you earn more than £100,000 in the tax year, your Personal Allowance will be reduced by £1 for every £2 that you earn above that amount.

Above the Personal Allowance, you will pay the following Income Tax rates on your director’s salary if you live in England, Wales, or Northern Ireland:

20% (basic rate) – income between £12,571 and £50,270
40% (higher rate) – income between £50,271 and £125,140
45% (additional rate) – income above £125,140

If you live in Scotland, you will instead pay the following Scottish Income Tax rates on your director’s salary above the Personal Allowance:

19% (starter rate) – income between £12,570 and £14,876
20% (basic rate) – income between £14,877 and £26,561
21% (intermediate rate) – income between £26,562 and £43,662
42% (higher rate) – income between £43,663 and £75,000
45% (advanced rate) – income between £75,001 and £125,140
48% (top rate) – income above £125,140

National Insurance rates and thresholds for 2024/25

National Insurance rates and thresholds are the same across the whole of the UK. The rate of employee Class 1 National Insurance for 2024/25 is 8%. It was cut from 10% in the Spring Budget 2024.

You will pay 8% Class 1 NIC on your director’s salary above £12,570. Your company will pay 13.8% employer’s Class 1 NIC on your salary income above £9,100.

Dividend tax rates for 2024/25

The tax-free dividend allowance for 2024/25 has been cut from £1,000 to £500. Above this amount, any dividends you receive from your limited company will attract the following tax rates, based on whichever Income Tax band(s) you fall into:

8.75% (basic rate) – income from £13,070 up to £50,270
33.75% (higher rate) – income from £50,271 up to £125,140
39.35% (additional rate) – income above £125,140

To work out your tax band, you need to add your total dividend income for the year to your other income. This means that you may have to pay more than one rate of dividend tax (i.e. if you’re a higher-rate or additional-rate taxpayer).

Whilst Income Tax rates in Scotland differ, this has no bearing on dividend tax. If you are a Scottish taxpayer, you will pay tax on dividends in accordance with the above thresholds.

What is the most tax-efficient director’s salary in 2024/25?

To determine the optimal director’s salary for 2024/25, you need to consider the thresholds for Class 1 National Insurance contributions and the annual tax-free Personal Allowance. You have three tax-efficient director’s salary options to choose from:

Option 1 – At least the Lower Earnings Limit

To protect your entitlement to the State Pension and benefits, the absolute minimum you should pay yourself in 2024/25 is £6,396 (£533/month, £123/week). This is the NIC Lower Earnings Limit (LEL).

You won’t pay Income Tax on your salary. Furthermore, neither you nor your company will pay Class 1 National Insurance on this income, but you will get the benefits of paying.

If you take a director’s salary below the LEL, you won’t earn NIC credits unless you make voluntary contributions.

Option 2 – Up to the Secondary Threshold

The Secondary Threshold is the point at which an employer is required to start paying Class 1 employer’s National Insurance (known as secondary contributions) on their directors’ and employees’ wages.

For the 2024/25 tax year, the Secondary Threshold is £9,100, which works out at £758/month or £175/week.

By paying yourself up to this amount through PAYE, your salary earnings will not be subject to Income Tax or Class 1 employee NIC. Furthermore, your company won’t have to pay any secondary contributions on your salary either.

Option 3 – Up to the Primary Threshold

Alternatively, if your company is eligible to claim the Employment Allowance, it may be more tax-efficient to take a director’s salary up to the NIC Primary Threshold of £12,570 per year (£1,048/month, £242/week).

The Primary Threshold is the point at which employees and directors are required to start paying 8% Class 1 NIC on their wages. It currently aligns with the annual tax-free Personal Allowance, so you won’t pay any Income Tax on your director’s salary either.

Whilst your company will have to pay 13.8% secondary contributions on your salary income between £9,100 and £12,570, you can use your Employment Allowance to reduce the company’s annual National Insurance liability up to £5,000.

Paying yourself dividends in 2024/25

Dividends are paid from company profits after accounting for Corporation Tax. The amount of dividend income you pay yourself will depend on:

how much distributable profit your company has available
what percentage of the company you own through shareholdings (e.g. if you own 100% of the shares, you are entitled to 100% of distributable profits)
whether you are trying to avoid entering a higher tax bracket

When your total annual income from all sources exceeds the Personal Allowance threshold of £12,570 and the annual tax-free dividend allowance of £500, your dividends will be subject to tax rates based on your Income Tax band(s). However, as mentioned, you won’t pay any National Insurance on your dividend income.

This means that, unless you receive a director’s salary and/or income from other sources, you can earn up to £13,070 of dividends tax-free in 2024/25. Anything above this amount will be subject to the dividend tax rates that we outlined earlier in the article.

Dividends – do all shareholders get them?
A guide to company director pension contributions
An introduction to Corporation Tax

Whilst dividend tax is tied to Income Tax bands, the rates are considerably lower than the rates of Income Tax. This is because companies pay between 19% and 25% Corporation Tax on their profits before issuing dividends to shareholders.

However, you will still pay less tax overall by taking a combination of a director’s salary and dividends as opposed to taking all of your income as a salary. The tax and NIC savings will be substantially larger if you are a higher-rate or additional-rate taxpayer.

We’ll take a look at a couple of examples below to see how this works in practice.

The best director’s salary and dividend structures for 2024/25

Your director’s salary is a tax-deductible business expense. This means that your company will save Corporation Tax on whatever amount you decide to take. Dividend income cannot be claimed as a business expense, but the personal tax and NIC savings usually make up for this.

Some company owners choose to limit their total annual income to remain within the basic Income Tax band and avoid paying higher rates. However, this is a personal choice and will depend on your individual circ*mstances and needs, as well as your long-term goals for the business.

Example 1 – Pay yourself a gross annual income of £50,270

You can earn up to £50,270 in the tax year as a basic-rate taxpayer. The most tax-efficient way to structure this income through a limited company is as follows:

Pay yourself a director’s salary of £9,100 (the NIC Secondary Threshold) over the course of the year
Take gross dividends of £41,170 at regular intervals throughout the year
You won’t pay any Income Tax or Class 1 employee National Insurance on your salary
The first £500 of dividend income will be tax-free due to the annual dividend allowance
A further £3,470 of dividend income will be tax-free due to the remainder of your Personal Allowance
You will pay 8.75% basic-rate dividend tax on the remaining £37,200 of dividend income = £3,255 tax on dividends

The total personal tax you will pay on your annual income will be £3,255. Your take-home pay for the year will be £47,015. The company itself will have no employer’s NIC to pay on your salary. It will also be able to claim the £9,100 salary as a business expense against its Corporation Tax liability.

Alternatively, you could take a salary of £6,396 (the NIC Lower Earnings Limit) and gross dividends of £43,874. This would give you the same gross annual income and take-home pay.

However, you wouldn’t be utilising the full employer’s NIC-free salary (£9,100) that is available to you. As a result, an additional £2,704 of company profits would be subject to Corporation Tax prior to being paid to you as dividends.

Taking a salary of £50,270 and no dividends

If you were to take the full £50,270 as a director’s salary, you would pay Income Tax of £7,540 and employee National Insurance contributions of £3,016.

This would leave you with a take-home pay of £39,714. The company would also pay £5,681 in secondary NICs.

This Income Tax calculation is based on the basic rate of 20% in England, Wales, and Northern Ireland. The tax liability will be marginally higher for Scottish taxpayers.

Example 2: Director’s salary of £12,570 + dividends of £62,430 = gross income of £75,000

If your annual income from all sources exceeds £50,270, you are no longer a basic-rate taxpayer. Your earnings will attract higher rates of Income Tax and/or dividend tax.

In this example where your remuneration is £75,000, let’s assume that your company is eligible to claim the Employment Allowance of £5,000. This means that you can take a higher salary whilst maintaining optimal tax efficiency.

Pay yourself a director’s salary of £12,570 (the NIC Primary Threshold and Personal Allowance limit) over the tax year
Take dividends of £62,430 at regular intervals throughout the year
You won’t pay any Income Tax or employee NIC on your salary
The first £500 of dividend income will be tax-free, due to the annual dividend allowance
You will pay 8.75% basic rate dividend tax on £37,200 of dividends = £3,255
You will pay 33.75% higher rate dividend tax on the remaining £24,370 of dividends = £8,225

The total personal tax you will pay on your annual income will be £11,480. Your take-home pay for the year will be £63,520.

The company will be liable to employer’s NIC on your salary between £9,100 and £12,570, which works out at £479. However, you can use some of the Employment Allowance to cover this, effectively removing the liability.

Taking a salary of £75,000 and no dividends

If you were to take the full £75,000 as a director’s salary, you would pay Income Tax of £17,432 (£7,540 basic-rate tax, and £9,892 higher-rate tax), as well as Class 1 employee NIC of £4,994. This would leave you with a take-home pay of £52,574.

The company would be liable to employer’s NIC on your salary between £9,100 and £75,000. This would work out at £9,094. The Employment Allowance may cover some of this, depending on the total amount of secondary NICs you pay on other employees’ wages.

These Income Tax calculations are based on the basic rate (20%) and higher rate (40%) in England, Wales, and Northern Ireland. The tax liability will be higher for Scottish taxpayers.

Do I need to operate PAYE to receive a director’s salary?

To pay directors’ salaries and employees’ wages, most companies need to register as employers with HMRC and operate Paye As You Earn (PAYE) within their payroll. This will be necessary if you or any of your employees:

are paid £123 or more per week
receive expenses and company benefits
are receiving a pension
have another job
received Jobseeker’s Allowance, Employment and Support Allowance, or Incapacity Benefit

If you need to pay any Income Tax or National Insurance on your salary, your payroll software will work out the liability and make the necessary deductions through PAYE.

A guide to PAYE for company owners

The company will be required to report your pay and deductions to HMRC on or before each payday and then make the necessary payments, usually each month.

If your company is eligible to claim Employment Allowance, you will also claim this through PAYE.

How and when do I pay tax on dividends?

Unlike salaries, dividends are not paid and taxed through PAYE. Instead, you will be responsible for declaring your dividend income to HMRC separately. To do so, you will need to register for Self Assessment, file a Self Assessment tax return after the end of the tax year, and pay any tax that you owe on these earnings directly to HMRC.

The deadline for filing a tax return and paying dividend tax is 31 January following the end of the tax year in which the dividend income is received. For example, for dividends received in the 2024/25 tax year, the deadline is 31 January 2026.

Do I need to register for Self Assessment if I run a Ltd company?

Since there is a lengthy delay between receiving dividends and paying personal tax on this income, it’s worthwhile setting aside the tax in a high-interest savings account. This presents a good opportunity to make your tax-efficient remuneration work even harder for you.

Alternatively, you could temporarily invest some or all of your Self Assessment tax in National Savings and Investments (NS&I) Premium Bonds. You won’t earn any interest, but you will be automatically entered into a monthly prize draw for a chance to win tax-free cash prizes. You can also withdraw your money at any time, so they are ideal for saving toward your future tax bill.

Thanks for reading

We hope the information in this guide has been useful and will help you choose the most tax-efficient director’s salary and dividend income for the 2024/25 tax year. There is a lot to consider, so we would recommend speaking to an accountant or tax advisor for tailored, professional advice.

Explore our other posts on the 1st Formations Blog for more company guidance and business advice. If you have any questions about this article or any of our services, please leave a comment below or contact our London-based team of company formation experts.