Everything you need to know about your directors salary for 2024/2025.
The basics – Understanding the differences between a shareholder and a Director.
Essentially, the shareholders of a company own a company through their holding of shares and they appoint directors to run the company on their behalf.
In a PSC, the shareholders and directors will often be the same person/people, but it’s important to understand the difference between the two roles.
When it comes to salary and dividends, a salary may be paid to directors for performing their duties as an officer of the company, and a dividend may be paid to shareholders for their share of post-tax distributed profits.
What assumptions do we make when assessing the optimum salary?
- You are a UK resident taxpayer with a standard personal allowance;
- Your only source of income is your salary and dividends from your limited company;
- You are not working inside IR35.
Most tax-efficient dividend and salary structure for 2024/25
For limited company contractors, taking a low salary with the balance of income being extracted as dividends is a common tax planning strategy.
The rationale for this is as follows:
- You withdraw a low tax-efficient salary, no higher than the personal allowance so that it does not attract personal tax;
- Ensure the salary is high enough for national insurance purposes i.e. that it counts as a year ‘stamp’ for your National Insurance history for pension purposes and other benefits;
- The salary is a tax-allowable cost for your business therefore corporation tax is saved on the gross salary;
- Any additional amounts you withdraw from your company would be treated as dividends which do not attract National Insurance;
- Please note that dividends are not a tax-allowable expense for your company (unlike a salary), so your company does not save corporation tax on the dividends.
What are the options?
Recommended options are as follows:
- Set your director’s salary at £12,570
- Set your director’s salary at £9,100
- Set your director’s salary at another amount
Recommended Director’s Fee of £12,570 (£1047.50 a month)
A sole director taking a salary at this level will incur National Insurance on their wages, but this is offset against the tax relief they can claim against Corporation Tax.
- Taking a salary at the Employee’s Primary Threshold and personal allowance threshold means that you do not pay the Employee’s National Insurance or income tax on your salary of 12,570.
- However, paying a salary above the Employer’s Secondary Threshold of £9,100 does mean that you’ll need to pay Employer NI contributions. It works out at about £478.86 for the year- however, you will be marginally better off by £248 and £376 respectively as a basic rate/higher rate taxpayer.
- If both directors take £12,570, then they have the additional benefit where the Employment Allowance reduces the Employer’s National Insurance cost to nil (up to £5,000).
- Although the company will incur the employer’s NI, it will also be able to claim tax relief for your salary, which will reduce your Corporation Tax bill. This reduction is more than the Employer’s NI that your company will need to pay on this salary, so will effectively cancel it out.
- As the £12,570 is above the Lower Earnings Limit of £6,396, you will still earn National Insurance credits, which count towards your state pension and can help qualify for some other benefits.
Take a salary of £9,100 (£758.33 a month)
Taking a slightly lower salary as a sole director can mean there’s more money left for dividends at the end of the year.
- As a sole director, you can’t claim the Employment Allowance, but this salary is at the Secondary Threshold, so your company won’t need to pay the Employer’s National Insurance on it anyway;
- The company can claim tax relief against your salary, which will help to reduce its Corporation Tax bill;
- This salary is lower than the Primary Threshold, so you won’t need to pay Employee’s NI.
- It’s above the Lower Earnings Limit, so you will still earn National Insurance credits, which contribute to your state pension.
- This is less than the tax-free Personal Allowance threshold, so some of your allowance is available for offset against dividends.
- As noted above, in the round, you will be marginally worse off by £248 and £376 respectively as a basic rate/higher rate taxpayer, if you opt for taking £9,100 rather than £12,570 during the year.
What if I have another source of income?
- The optimum amount for the director’s payroll takes advantage of the Personal Allowance (£12,570). If you are already using it up because you have other income from elsewhere, then director’s payroll becomes PAYE payroll, and subject to tax and National Insurance as normal- therefore it may be inefficient to process a Director’s salary in these circumstances.
What happens if I start a company but don’t take a director’s salary straight away?
- If you register a limited company but wait a few months before taking a wage, you can backdate your optimum salary to the incorporation date and still remain tax efficient as long as you’re still in the same financial year.
- If a director joins the business later on, the National Insurance threshold is pro-rated from the date that the director is appointed, regardless of when the salaries actually start being paid.
Taking another amount as salary
- Taking a higher salary might affect your company’s cash flow throughout the year (and will leave a bit less in the pot for dividends).
Conclusion
The most efficient salary for a sole director in 2024/25 is £12,570.
The most efficient salary for 2 or more directors in 2024/25 is £12,570 each.
This is because two or more directors can take an annual salary up to the Primary Threshold without needing to pay the Employee’s National Insurance, and then claim the £5,000 Employment Allowance to cover the portion of the employer’s National Insurance they would otherwise incur.
It is important to note it is up to you as the director/shareholder to decide how much salary and/or dividends you want to pay.
If you require further advice in this respect, arrange a chat with your accountant.