The below article is about tax efficiency, this includes how much you should pay yourself in salary and dividends in the tax years if you have no other income. It also discusses how these amounts might change if you have other income during the year, have made pension contributions or charitable donations or became a director part way through the tax year.
This article is aimed at Limited company directors and not sole traders.
Tax Efficient Salary/Dividend Amounts:
Below are the recommendations for the tax efficient amount of salary and dividends to take. Please note these are based on the assumption that no other income has been received during the tax year and that no personal pension or gift aid contributions have been made.
We have also assumed you are UK tax resident and that you live in England.
24/25 Tax Year – 06/04/2024 to 05/04/2025 [23/24 Tax Year 06/04/2023 to 05/04/2024]:
The basic rate tax band for both the 23/24 and 24/25 tax years is £50,270. There are two tax efficient ways to withdraw money from the company as below:
Option 1:
Salary: £12,570 (£1,047.50 per month)
Dividends: £37,700
There will be no Tax or Employee National Insurance to pay on this salary however there will be £478.86 of Employers National Insurance to pay for the months January to March which means you will need to make quarterly payments to HMRC.
There will also be tax on any dividends taken. For 23/24 there is a £1,000 dividend allowance and the remaining £36,700 in dividends will be taxed at 8.75% totalling £3,211.55 in dividend tax.
For 24/25 there is a £500 dividend allowance with the remaining £37,200 taxed at 8.75% totalling £3,255 in dividend tax.
Option 2:
Salary: £9,100 (£758 per month)
Dividends: £41,170
There will be no Tax, Employee National Insurance or Employers National Insurance to pay on this salary.
Overall option 1 is more tax efficient than option 2 however option 2 does decrease the amount of admin there is to do as there will not be any Tax or NI to pay on the salary.
Please be aware there are exceptions to the above figures, please see below for further information.
Basic Rate Bands
The basic rate band added to your personal allowance for both the 23/24 and 24/25 tax years is £50,270. This includes the £12,570 tax free personal allowance and then £37,700 of the basic rate band. This is what we use to work out the above amounts of salary and dividends as any income earned up to this threshold (after the personal allowance of £12,570 has been deducted) will be taxed at the basic rate of tax.
The basic rate band can change if you have made any personal pension contributions (these are those made by you personally and not through your limited company or through employment - unless the scheme is "Relief at source") or personal charitable donations. The basic rate band would increase by the gross amount contributed/donated.
For example a person who contributed a gross of £500 personally to their pension would have a basic rate band of £50,770 (£50,270 + £500). Therefore an extra £500 would be taxed at the basic rate rather than the higher rate if they were a higher rate tax payer.
In this situation you could then take the recommended salary of £9,100 and dividends of £41,670 (recommended £41,170 + £500)
Therefore if you are a higher rate tax payer it is beneficial to make personal pension contributions or make charitable donations to allow you to draw more dividends out of the limited company tax efficiently.
Employment Allowance
If you have more than one director (or other employees) you could be eligible for the employment allowance. This means you can take above the salary threshold (£9,100) and be exempt from paying employers NIC.
Please be aware that both directors would need to take the higher salary for this allowance to be claimed.
The tax efficient salary and dividends to take to claim this allowance for 23/24 would be:
Salary: £12,570 (£1,047.50 per month)
Dividends: £37,700
There will be no Tax, Employee National Insurance or Employers National Insurance to pay on this salary.
Other Income
If other income has been received this will decrease the amount of dividends you can take efficiently from your limited company.
If you are unsure on the tax efficient amounts due to having other income please get in touch and we can advise on this.
An example of this would be if you have received £10,000 of income in the 24/25 tax year from a PAYE role. This would then reduce the amount of dividends you could take tax efficiently by that £10,000. Therefore the tax efficient amounts to take would be £9,100 in salary and £31,170 (this is the originally recommended £41,170 - £10,000).
Becoming a director part way through the tax year:
If you became a director part way through the tax year the salary will need to be pro-rata’d. You are also likely to have other income so please get it touch with us and we can advise on tax efficient salary and dividends you can take for the remainder of the tax year.