How to pay yourself tax efficiently in 2024/2025

Maximise Your Tax Efficiency: Paying Yourself through PAYE and Dividends

Written by 
James Morgenstern
Updated on
May 7, 2024

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.

Salary 

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. 

You could pay a smaller salary of £9,100 a year (£758 pm) and have no Employers NI to pay, but you would save less in Corporation Tax relief (~£750), so you would be worse off overall. Either salary would count as a qualifying year for your state pension.

Tax Band Total Earnings 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%

An important exception:

Before paying yourself £12,570 a year it is important to consider if you have already used up some or all of your tax free allowance.

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: 

  1. Have multiple limited companies you’re paying yourself through
  2. Have a salaried job as well as your limited company
  3. Have just transitioned from being a sole-trader to opening a limited company
  4. Expect to take any ‘inside IR35 contacts’ this tax year
  5. Own a rental property in your own name
  6. Make income from trading shares that are not within an ISA or SIPP
  7. Earn income, interest or dividends from other investments

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. 

Setting up 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.

Dividends

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.

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%

FAQs

How to pay yourself a dividend?

  • With Mighty? Mighty shows 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 - creating all documentation and dividend certificates for you. 
  • Not with Mighty? You should consult your accountant who can figure out how much money you can take, advise how much tax liability you’ll incur and prepare the dividend paperwork for you. 

How much should I pay myself through dividends?

The amount you pay yourself through dividends is entirely up-to you and should be based on your personal needs. It is nearly always most tax efficient to pay yourself through dividends (rather than salary) once your tax free allowance is reached. 

That said, you must not issue more in dividends than the company has made in post-tax profits. You should also note that, the more dividends you issue the more personal tax you incur, so it is important to keep track of your personal tax liability. 

Mighty makes this easy. Mighty automatically shows your ‘total funds available for dividends’ and how much personal tax liability is building up on all salary and dividends taken to date. 

When should you pay yourself a dividend? 

You can pay yourself dividends on an ad-hoc, quarterly or annual basis.

You should avoid paying yourself a regular monthly dividend as this could be viewed by HMRC as a salary, rather than a distribution of profits. 

A real world example:

Let’s bring the above together with a real-world example of paying yourself £52,570 through salary and dividends to illustrate how tax efficient the structure above is. 

Tax Band Personal earnings Tax paid
Salary £12,570 £0
Dividends £37,000 £3,194
Total £52,570 £3,194
In this you'd receive ‘take home earnings’ of over £49,000 and have an effective personal income tax rate of just 6%.

This is highly tax efficient but is important to not get too carried away as we must remember that the £37,000 of dividends can only be issued after the company has paid corporation tax and the £478 of employers national insurance on the £12,570 of salary. 

Other ways to extract money tax efficiently:  

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 can receive tax relief on these expenses, and you’ll reimburse yourself for the cost you personally laid out for. Over the course of the year, these expenses can really add up.

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. 

Pension Contributions

Making contributions to a pension scheme is generally extremely tax-efficient as company contributions to pension schemes are tax deductible expenses, meaning they lower the amount of corporation tax you pay. Pensions contributions also do not incur income tax or NI, so can then grow tax-free within your personal pension to deliver a significant benefit in retirement.

Pension contributions are a huge topic in their own right so we will cover in depth in another guide.

Company benefits

While some benefits-in-kind (like company cars) can end up being a tax burden, others can be extremely tax-efficient.

For example, if a mobile phone contract is in the company's name, it's exempt from tax and NICs. By expensing these tax efficient items through the company you lower your corporation tax bill and avoid using your own post-tax personal incom. 

Mighty is packed with tax tips that can save you hundreds and thousands of pounds per year. To access the tax savings, create a Mighty account login to the Tax Tips section of Mighty to learn more and instantly apply the savings in a click. 

Conclusion

Understanding and using the most tax-efficient methods for paying yourself as a company director is crucial for maximising your money. 

If you're looking for a great accounting solution to manage your bookkeeping, tax and accounts, book a free consultation with a Mighty accounting expert today. It's time to take control of your finances and make your money work harder for you.

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