Introduction
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.
The basics
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.
Paying yourself a salary (PAYE)
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.
Tax Bands
Tax Bands
| Tax Band |
Range |
Income Tax Rate |
| Personal Allowance |
Up to £12,570 |
0% |
| Basic Rate |
Over £12,570 to £50,270 |
20% |
| Higher Rate |
Over £50,570 to £125,140 |
40% |
| Additional Rate |
Over £125,140 |
45% |
National insurance
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!
Exceptions to the rule:
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:
- Have multiple limited companies
- Have a job as well as run your limited company
- Have just transitioned from being a sole-trader to opening a limited company
- Own a rental property in your own name
- Make income from trading shares (not within an ISA or SIPP)
- Earn significant income from other investments (including taxable interest and dividends)
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.
Dividends
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.
Tax Bands and Rates
Tax Bands and Rates
| Tax Band |
Range |
Income Tax Rate |
Dividend Tax Rate |
| Personal Allowance |
Up to £12,570 |
0% |
0% |
| Basic Rate |
Over £12,570 to £50,270 |
20% |
8.75% |
| Higher Rate |
Over £50,570 to £125,140 |
40% |
33.75% |
| Additional Rate |
Over £125,140 |
45% |
39.35% |
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.
How to pay yourself a dividends
- With Mighty: Mighty will tell you how much money you have available to take as dividends. You can then click to issue a dividend, pay yourself the money and Mighty will take care of all the admin for you.
- Not with Mighty? You should consult your accountant who can figure out how much money you can take, then prepare the dividend paperwork and process it in your accounts for you.
Reimbursing personal expenses
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:
- Travel costs - such as mileage to visit clients, parking and train fares
- Food & drink - whilst travelling for business
- Working from home allowances - such as claiming electricity & broadband.
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.
How to reimburse expenses
- With Mighty: Mighty makes this a breeze. You can simply click ‘Add an expense’, or ‘Add mileage’. Mighty will do all the admin, manage the calculations, apply the tax savings, and confirm the amount you can pay yourself tax-free.
- Not with Mighty? You can use a spreadsheet for each of your expenses and trips, then pass this information to your accountant who will tell you how much you can pay yourself at the end of year, once they’ve done your accounts.
Other ways to extract money tax efficiently from your company
Company benefits
While some benefits-in-kind (like company cars) can end up being a tax burden, others can be quite tax-efficient. For example:
- Health Insurance: A company-paid health insurance policy can be a valuable benefit and might be more tax-efficient than taking out a policy personally.
- Mobile Phones: If a mobile phone contract is in the company's name and is primarily for business use, it's exempt from tax and NICs.
- Trivial benefits: Company directors can receive up-to £300 of benefits a year without any income tax or NI costs
- Buying a Bike: Thinking of buying a new bicycle, your company can buy one, expense it against tax and you can benefit without any personal taxes paid
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.
Pension Contributions
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.
Conclusion
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.
