Director’s salary and dividends for 2024/25

Director’s salary and dividends for 2024/25

As business owners of a limited company, typically, the best way to pay yourself via your limited company is to take a low director’s salary and then top up your earnings with regular dividend payments.

 

As tax thresholds and allowances often change at the start of a new tax year, it’s important to review this annually to ensure that you’re paying yourself in the most tax-efficient way.

 

Therefore, read on to understand the optimal director’s salary and dividend structure for the 2024/25 tax year, which runs from 6 April 2024 until 5 April 2025.

 

We will also clarify the Income Tax, National Insurance Contributions (NIC) and dividend tax you may have to pay on your personal income, depending on how much you earn in the year.

 

Income Tax rates and thresholds for 2024/25

The annual tax-free Personal Allowance remains the same and is £12,570. This means that your first £12,570 of income will be tax-free.

Above the Personal Allowance, you will pay the following Income Tax rates on your director’s salary if you live in England, Wales, or Northern Ireland:

  • 20% (basic rate) – income between £12,571 and £50,270
  • 40% (higher rate) – income between £50,271 and £125,140
  • 45% (additional rate) – income above £125,140

If you live in Scotland, you will instead pay the Scottish Income tax rates which are different from these – please get in touch for further information.

 

National Insurance rates and thresholds for 2024/25

National Insurance rates and thresholds are the same across the whole of the UK. The rate of employee Class 1 National Insurance for 2024/25 is 8%. It was cut from 10% in the Spring Budget 2024.

 

You will pay 8% Class 1 NIC on your director’s salary above £12,570. Your company will pay 13.8% employer’s Class 1 NIC on your salary income above £9,100.

 

Dividend tax rates for 2024/25

The tax-free dividend allowance for 2024/25 has been cut from £1,000 to £500. Above this amount, any dividends you receive from your limited company will attract the following tax rates, based on whichever Income Tax band(s) you fall into:

  • 75% (basic rate) – income from £13,070 up to £50,270
  • 75% (higher rate) – income from £50,271 up to £125,140
  • 35% (additional rate) – income above £125,140

To work out your tax band, you need to add your total dividend income for the year to your other income. This means that you may have to pay more than one rate of dividend tax (i.e. if you’re a higher-rate or additional-rate taxpayer).

Whilst Income Tax rates in Scotland differ, this has no bearing on dividend tax. If you are a Scottish taxpayer, you will pay tax on dividends in accordance with the above thresholds.

 

What is the most tax-efficient director’s salary in 2024/25?

To determine the optimal director’s salary for 2024/25, you need to consider the thresholds for Class 1 National Insurance contributions and the annual tax-free Personal Allowance. The options below will help you decide how much income you will take as salary.

  1. Take a salary up to the NIC Secondary Threshold of £9,100 for the year – usually paid monthly via payroll.
  2. Pay yourself up to the NIC Primary Threshold and Personal Allowance limit of £12,570 for the year – usually paid monthly via payroll.

 

Unless you intend to take all of your income as a salary rather than pay yourself a combination of salary and dividend income, you should choose one of these options. Let’s take a look at them both below.

Option 1 – Up to the Secondary Threshold 

The Secondary Threshold is the point at which an employer is required to start paying Class 1 employer’s National Insurance (known as secondary contributions) on their directors’ and employees’ wages.

 

For the 2024/25 tax year, the Secondary Threshold is £9,100, which works out at £758/month or £175/week.

 

By paying yourself up to this amount through PAYE, your salary earnings will not be subject to Income Tax or Class 1 employee NIC. Furthermore, your company won’t have to pay any secondary contributions on your salary either.

 

Option 2 – Up to the Primary Threshold 

Alternatively, if your company is eligible to claim the Employment Allowance, it may be more tax-efficient to take a director’s salary up to the NIC Primary Threshold of £12,570 per year (£1,048/month, £242/week).

 

The Primary Threshold is the point at which employees and directors are required to start paying 8% Class 1 NIC on their wages. It currently aligns with the annual tax-free Personal Allowance, so you won’t pay any Income Tax on your director’s salary either.

 

Whilst your company will have to pay 13.8% secondary contributions on your salary income between £9,100 and £12,570, you can use your Employment Allowance to reduce the company’s annual National Insurance liability up to £5,000.

 

Paying yourself dividends in 2024/25

Dividends are paid from company profits after accounting for Corporation Tax. The amount of dividend income you pay yourself will depend on:

  • how much distributable profit your company has available
  • what percentage of the company you own through shareholdings (e.g. if you own 100% of the shares, you are entitled to 100% of distributable profits)
  • whether you are trying to avoid entering a higher tax bracket

 

When your total annual income from all sources exceeds the Personal Allowance threshold of £12,570 and the annual tax-free dividend allowance of £500, your dividends will be subject to tax rates based on your Income Tax band. However, as mentioned above, you won’t pay any National Insurance on your dividend income.

 

This means that, unless you receive a director’s salary and/or income from other sources, you can earn up to £13,070 of dividends tax-free in 2024/25. Anything above this amount will be subject to the dividend tax rates that we outlined above.

Whilst dividend tax is tied to Income Tax bands, the rates are considerably lower than the rates of Income Tax. This is because companies pay between 19% and 25% Corporation Tax on their profits before issuing dividends to shareholders.

However, you will still pay less tax overall by taking a combination of a director’s salary and dividends as opposed to taking all of your income as a salary. The tax and NIC savings will be substantially larger if you are a higher-rate or additional-rate taxpayer.

We’ll take a look at a couple of examples below to see how this works in practice.

 

Director’s salary and dividend structures for 2024/25

Your director’s salary is a tax-deductible business expense. This means that your company will save Corporation Tax on whatever amount you decide to take. Dividend income cannot be claimed as a business expense, but the personal tax and NIC savings usually make up for this.

Some company owners choose to limit their total annual income to remain within the basic Income Tax band and avoid paying higher rates. However, this is a personal choice and will depend on your individual circumstances and needs, as well as your long-term goals for the business.

 

Example 1 – Pay yourself a gross annual income of £50,270

You can earn up to £50,270 in the tax year as a basic-rate taxpayer. The most tax-efficient way to structure this income through a limited company is as follows:

  • Pay yourself a director’s salary of £9,100 (the NIC Secondary Threshold) over the course of the year
  • Take gross dividends of £41,170 at regular intervals throughout the year
  • You won’t pay any Income Tax or Class 1 employee National Insurance on your salary
  • The first £500 of dividend income will be tax-free due to the annual dividend allowance
  • A further £3,470 of dividend income will be tax-free due to the remainder of your Personal Allowance
  • You will pay 8.75% basic-rate dividend tax on the remaining £37,200 of dividend income = £3,255 tax on dividends

The total personal tax you will pay on your annual income will be £3,255. Your take-home pay for the year will be £47,015. The company itself will have no employer’s NIC to pay on your salary. It will also be able to claim the £9,100 salary as a business expense against its Corporation Tax liability.

 

Taking a salary of £50,270 and no dividends

If you were to take the full £50,270 as a director’s salary, you would pay Income Tax of £7,540 and employee National Insurance contributions of £3,016.

This would leave you with a take-home pay of £39,714. The company would also pay £5,681 in secondary NICs.

 

Example 2: Director’s salary of £12,570 + dividends of £62,430 = gross income of £75,000

If your annual income from all sources exceeds £50,270, you are no longer a basic-rate taxpayer. Your earnings will attract higher rates of Income Tax and/or dividend tax.

In this example where your remuneration is £75,000, let’s assume that your company is eligible to claim the Employment Allowance of £5,000. This means that you can take a higher salary whilst maintaining optimal tax efficiency.

  • Pay yourself a director’s salary of £12,570 (the NIC Primary Threshold and Personal Allowance limit) over the tax year
  • Take dividends of £62,430 at regular intervals throughout the year
  • You won’t pay any Income Tax or employee NIC on your salary
  • The first £500 of dividend income will be tax-free, due to the annual dividend allowance
  • You will pay 8.75% basic rate dividend tax on £37,200 of dividends = £3,255
  • You will pay 33.75% higher rate dividend tax on the remaining £24,370 of dividends = £8,225

The total personal tax you will pay on your annual income will be £11,480. Your take-home pay for the year will be £63,520.

The company will be liable to employer’s NIC on your salary between £9,100 and £12,570, which works out at £479. However, you can use some of the Employment Allowance to cover this, effectively removing the liability.

 

Taking a salary of £75,000 and no dividends

If you were to take the full £75,000 as a director’s salary, you would pay Income Tax of £17,432 (£7,540 basic-rate tax, and £9,892 higher-rate tax), as well as Class 1 employee NIC of £4,994. This would leave you with a take-home pay of £52,574.

The company would be liable to employer’s NIC on your salary between £9,100 and £75,000. This would work out at £9,094. The Employment Allowance may cover some of this, depending on the total amount of secondary NICs you pay on other employees’ wages.

Some FAQ’s to consider…..

Do I need to operate Pay as you earn (PAYE) to receive a director’s salary?

To pay directors’ salaries and employees’ wages, companies need to register as employers with HMRC and operate PAYE within their payroll.

Please talk to us here at Kennedys Accounting and we will be pleased to set up a scheme for you and advise accordingly with regards to making payments to HMRC, claiming your employment allowances and any other payroll queries you may have.

 

How and when do I pay tax on dividends?

Unlike salaries, dividends are not paid and taxed through PAYE. Instead, you will be responsible for declaring your dividend income to HMRC separately. To do so, you will need to register for Self-Assessment, file a Self-Assessment tax return after the end of the tax year, and pay any tax that you owe on these earnings directly to HMRC.

Here at Kennedys Accounting, we have packages available for company directors to look after your self-assessment as part of your accounting package and we will complete your self-assessments as part of this service and advise accordingly with regards to dividends, salary and taxation.