When running a limited company, understanding how to pay yourself in the most tax-efficient manner is crucial. At eAccounts, we help you optimise your salary, dividends, and expenses to keep more of your hard-earned money.
How Do You Pay Yourself as a Limited Company Director?
As a director of a limited company, there are three primary ways to pay yourself: through salary, dividends, and reimbursing personal expenses. Each option offers different tax implications, but when used correctly, they can help you minimise your tax burden and keep more money in your pocket.
The most common and tax-efficient method is to pay yourself a low salary and take any additional income through dividends. Dividends are taxed at a lower rate compared to salary and are exempt from National Insurance Contributions (NICs), making them an attractive option for most directors.
Additionally, you can also reimburse yourself for business-related expenses. These reimbursements are tax-free and can significantly reduce the overall taxable profit of your company.
Paying Yourself a Salary (PAYE)
A salary is a regular payment made through payroll, which is subject to PAYE (Pay As You Earn) tax. While salaries are tax-deductible and reduce the taxable profit of your company, they are subject to both income tax and National Insurance Contributions (NICs).
To optimise tax efficiency, you should aim to pay yourself a salary below the personal tax allowance of £12,570. This ensures that no income tax is payable.
Income Tax Bands:
| Tax Band | Total Earnings | Income Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
National Insurance (NICs):
Salaries are also subject to National Insurance contributions:
- As a director, you will personally pay 12% NIC on earnings between £12,570 and £50,270.
- Your company will pay 13.8% NIC on salaries over £9,100.
Optimal Salary Level:
The most tax-efficient salary for a director is often £9,100. At this level, you avoid paying both income tax and National Insurance Contributions while maintaining eligibility for state pension benefits. This is a huge advantage for directors.
Exceptions to the Rule:
Be cautious if you fall into any of the following categories, as paying yourself £9,100 may not always be optimal:
- You have multiple limited companies.
- You have another job alongside your limited company.
- You own rental properties or have income from other investments.
- You are transitioning from being a sole trader to a limited company.
If you fall into any of these categories, it’s advisable to consult your accountant before setting your salary.
Dividends: The Tax-Efficient Way to Pay Yourself
Once you’ve paid yourself a salary up to the £9,100 threshold, you can pay yourself further income through dividends.
Dividends are paid from the company’s after-tax profits and are not subject to NICs. Dividends are taxed at a lower rate than salary, making them a tax-efficient way to extract income from your company.
Tax-Free Dividends and Tax Bands:
The tax-free dividend allowance in the UK is £1,000 for the 2023/24 tax year. This means the first £1,000 of dividends you receive are tax-free. However, for the 2024/25 tax year, the dividend allowance will be reduced to £500. After this threshold, any dividends above the allowance will be taxed according to the applicable dividend tax rates, based on your total income (including salary and other earnings).
| Tax Band | Range | Dividend Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 8.75% |
| Higher Rate | £50,271 to £125,140 | 33.75% |
| Additional Rate | Over £125,140 | 39.35% |
It’s important to plan accordingly for these changes, especially if you’re expecting to receive significant dividend income in the 2024/25 tax year. Always consult with an accountant to ensure you are optimising your tax position as allowances and rates change.
How to Pay Yourself Dividends:
With eAccounts, we’ll guide you through the process of paying yourself dividends. Our system allows you to see exactly how much you can take, and we’ll handle all the necessary paperwork.
Reimbursing Personal Expenses
If you’ve paid for business-related expenses personally, it’s tax-efficient to reimburse yourself from the company. This will help reduce your company’s taxable profits while ensuring you’re reimbursed for legitimate expenses.
Examples of claimable expenses include:
- Travel costs: Mileage, parking, and train fares.
- Food & drink: For business travel.
- Home office expenses: Such as broadband and electricity.
Ensure that you maintain a proper record of all expenses to ensure you can claim them correctly without triggering any tax or NIC issues.
How to Reimburse Expenses:
With eAccounts, we make it simple. Just enter your expenses, and we’ll do the rest, including managing the tax savings.
Additional Tax-Efficient Ways to Extract Money
Beyond salary and dividends, there are other ways to extract money from your company in a tax-efficient manner:
Company Benefits:
Some company-paid benefits are tax-efficient, such as:
- Health Insurance: Company-paid health insurance is a valuable benefit and may be more tax-efficient than individual policies.
- Mobile Phones: If a mobile phone contract is in the company’s name and used primarily for business, it’s exempt from tax and NICs.
- Trivial Benefits: Company directors can receive benefits up to £300 per year without any tax or NICs.
- Company Bike: Your company can buy a bike for business use, expense it, and you benefit without personal taxes.
Pension Contributions:
Contributions to a pension scheme are highly tax-efficient. They’re deductible expenses for the company, reducing the overall taxable profit and lowering corporation tax. These contributions also grow tax-free within your pension.
Conclusion:
Understanding how to pay yourself as a limited company director is key to minimising your tax burden and maximising your income. Whether it’s through salary, dividends, expenses, or company benefits, there are numerous strategies to ensure you’re getting the most out of your limited company.
If you need help, our expert team at eAccounts is ready to guide you through the most tax-efficient options. Book a consultation today, and let us help you optimise your pay.
