When running a limited company, every penny counts, so understanding how to efficiently pay yourself is key. There are two ways to paying yourself as a director of a limited company; salary and dividends.
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.
For maximum tax efficiency you may also want to consider pension contributions which we also briefly cover below. Let's dive in.
A salary is what you pay yourself through monthly payroll that is subject to PAYE income tax. Salaries are tax deductible, so they help to lower the company’s Corporation Tax bill which is a great thing for you to benefit from.
For 2024/25, everyone in the UK gets a tax free personal allowance of £12,570. In simple terms, this is the amount of income you can earn that will be income tax free. Therefore, if you receive no or other income from 6th April 2024 to 5th April 2025, the most tax efficient salary would be £12,570 per year (equivalent to £1,047.50 per month).
It is however important to note that salaries are subject to National Insurance Contributions (NICs) from both the employee & employer. At a salary of £12,750 you would incur ~£478 of Employers National Insurance (which the company has to pay), however the amount you save in Corporation Tax outweighs this so it is still the most tax efficient way to pay yourself.
In total, by paying yourself a salary of £12,570, you actually lower your company’s Corporation Tax bill by up-to £3,262.
You could pay a smaller salary of £9,100 a year (£758 pm) and have no Employers NI to pay, but you would miss out on up-to £867 of Corporation Tax savings, so you would be up-to £390 worse off overall. Either salary would count as a qualifying year for your state pension.
Before paying yourself £12,570 a year it is important to consider if you have already used up (or will use up) some or all of your tax free allowance in the current tax year.
If you're making any personally taxed income outside your business (e.g. other employments, rental properties etc.), the total amount you've made outside your business should be deducted from this £12,570. For example, if you make £1000pa in investment income, you'd only pay yourself a yearly salary of £11,570.
Alternatively, if you’ve made over £12,570 since April 6th, you would have already exceeded your personal tax free allowance. In this instance you would be better off paying yourself dividends rather than salary through your limited company until the next tax year.
Common instances of when a £12,570 is not optimal include if you:
If you fall into any of these 7 categories, you should speak with your accountant to determine the optimal amount to pay yourself through salary, before paying yourself through payroll.
Before you can set-up payroll you first have to register for PAYE which is quick and easy to do. You can learn how to do this here. Once registered HMRC will post your PAYE reference and an Accounts Office Reference to you.
All PAYE and payroll submissions must be submitted via RTI compliant software. There are many payroll software providers which work with businesses of varying sizes. If you’re a freelancer, contractor or small business with only 1 or 2 directors, Mighty is designed for you.
Once you've registered for PAYE you can set-up payroll in your Mighty account under the ‘Paying Yourself’ tab. From there, Mighty will generate your payslip, calculate any Income Tax, Employers or Employee National insurance you owe, and submit all details to HMRC for you. It couldn’t be easier.
Once you’ve exhausted your tax free allowance, it’s highly tax efficient to pay yourself any further money from the company through dividends.
Dividends are payments of a company's profits to its shareholders after all bills and tax liabilities have been accounted for. In other words, after your company has paid corporation tax (and other upcoming bills) you can pay-yourself the reserves in the form of dividends.
As outlined in the table below, dividends have a much lower tax rate than salaried income. In addition, dividends are not subject to NICs, hence why it is much more tax efficient to pay yourself through dividends as a company shareholder.
As a further bonus in 2024/25, the first £500 of dividend income is also tax-free.
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