When running a limited company, every penny counts, so understanding how to efficiently pay yourself is key.
Let’s explore the most tax-efficient methods for company directors to pay themselves.
There are broadly three main options when it comes to paying yourself as a director of a limited company, salary, dividends and reimbursing yourself for expenses.
For tax efficiency, most company directors will choose to pay themselves a low salary and take any further money from the company in the form of dividends. This is because dividends are taxed at a lower rate than salary, and avoid national insurance contributions.
Any expenses can then be repaid by the company free from tax and national insurance. For maximum tax efficiency you may also want to consider maximising company benefits and pension contributions.
Let’s dive in to show you how it works.
A salary is what you pay yourself through payroll as is subject to PAYE tax. As salaries are tax deductible they help to lower the company’s taxable profit, and therefore the tax the company pays.
For tax efficiency you’ll want to pay yourself below the personal tax allowance of £12,570, as any salary you earn over £12,570 is then taxed at the following Income Tax rates.
Salaries are also subject to National Insurance Contributions (NICs) from both the employee & employer. This makes a big difference.
On your director’s salary, you will personally pay 12% NIC on earnings between £12,570/year and £50,270/year. Additionally, your company will pay 13.8% NIC on salaries over £9,100 per year.
Therefore it’s generally optimal to set yourself a salary of £9,100 annually. This ensures no income tax, employer or employee national insurance contributions, yet you still maintain eligibility for state pension benefits. A huge tax win all round!
There are exceptions to the rule, which you should be aware of before paying yourself £9,100 a year, as you may have already used some or all of your tax free allowance up.
For example, if you have already earned (or expect to receive taxable income) over £12,570 in the coming fiscal year - it will not be tax efficient to also pay yourself through payroll.
This is very common if you:
If you fall into any of these 6 categories, you should consult your accountant before paying yourself through payroll. If you're a Mighty customer you can do so for free through support in the platform.
Once you’ve paid yourself up-to £9,100 of payroll or exhausted your tax free allowance, it’s generally most tax efficient to pay yourself any further money through dividends
Dividends are payments made by a company from its profits to its shareholders after it has accounted for all upcoming expenses and liabilities.
In the 2023/24 tax year the first £1000 of dividends you receive are tax free. Thereafter all dividends will be taxed according to the percentages in the tax below.
Note: The tax band you fall in is based on the overall level of your income, not just dividends. In other words, if you had received PAYE income up to £52,270 and then paid yourself a £5,000 dividend. The first £1000 would be taxed at 0%, the remaining £4,000 would be subject to the higher rate of 33.75%.
Unlike salaries, dividends are not subject to NICs and it is for this reason that dividends are tax efficient to pay yourself as a company director and shareholder.
Beyond salaries & dividends you should also be sure to reimburse yourself for any expenses you have personally paid for on behalf of the company.
It’s incredibly tax efficient to do so, as your business will receive tax relief on these expenses, and you’ll reimburse yourself for the cost you personally laid out for.
Examples may include:
Regardless of your expenses, it's crucial to maintain a good record of your expenses and reimburse yourself in the correct way, to avoid any potential tax or national insurance burdens.
While some benefits-in-kind (like company cars) can end up being a tax burden, others can be quite tax-efficient. For example:
Mighty is packed with tax tips that can save you thousands of pounds. If you’re a Mighty user, you can login in to the Tax aving section of Mighty to learn more and apply the savings in a click.
Alternatively, you can learn more on our blog and YouTube channel here.
Making contributions to a pension scheme is generally extremely tax-efficient as company contributions to pension schemes are deductible expenses.
This means they can reduce the company's overall taxable profit, leading to lower corporation tax. These tax free contributions can then grow tax-free within your personal pension to deliver a significant benefit in retirement.
Understanding and leveraging the most tax-efficient methods for paying yourself as a company director is crucial for maximising your earnings.
If you're unsure about how to proceed, we highly recommend trying Mighty or bookkeeping a call with a free 30 minute call with a Mighty accounting expert.
Already a Mighty customer? Don't hesitate to send us a message or book a consultation within the platform. We’ll always be happy to help.