It is well documented that running a business as a limited company can minimise your tax liabilities, however, to achieve this it is important to manage the company’s finances in a structured way.
Unlike a sole trader, who pays income tax and National Insurance on all profits in that year, a limited company allows you to pay yourself in a more tax-efficient way, using a mixture of salary and dividends.
At a4c we have produced the following guide with information on how to pay yourself, based on the 2024/25 tax rates and thresholds.
Why take a salary?
A monthly salary means that you have regular income throughout the year and because directors are ‘office holders’ you can pay yourself below national minimum wage, without breaking any rules.
Salary payments above £6,396 will be classed as a qualifying contribution towards your State Pension, which is important as you need 35 years of contributions to obtain this at retirement age.
Salaries are classed as a legitimate business expense and therefore your company will save Corporation Tax on these payments.
So how much salary should you pay yourself from your own limited company?
To be as tax efficient as possible, paying yourself as a company director is a bit of a balancing act. There are a few things to consider:
- The number of directors
- The number of other employees and how much they earn
- National Insurance rates for employers and employees
- Income tax rates and thresholds
- Tax allowances for dividends
- Corporation Tax relief for employee salaries
- Other sources of income
- How organised you are with payments to HMRC!
In 2024/25 most directors will either pay themselves to the National Insurance threshold OR they will pay themselves to the Personal Allowance threshold.
1. Take a salary up to the National Insurance threshold (£9,100)
If you can’t claim the employment allowance, because you are the sole director/employee, or want to keep things simple (we like simple!) then this is a good strategy for you.
The Employer’s National Insurance Threshold (Secondary Threshold) for 2024/25 is £9,100, therefore we would suggest a monthly salary of £758.
About this strategy:
- You protect your entitlement to future state pension and benefits
- There’s nothing to pay to HMRC each month in relation to National Insurance or Income Tax, meaning a reduction in admin and no impact to your cash flow
- You save Corporation Tax (approximately £1,729 to £2,275, depending on profits)
- The Personal Allowance in 2024/25 is £12,570 and the Dividend Allowance is £500 therefore with a salary of £9,100 you can take a further £3,970 in tax free dividends.
2. Take a salary up to the Personal Allowance (£12,570)
If you have two directors on the payroll, or one director but another employee, then you could qualify for the Employment Allowance. This enables you to claim £5,000 off your employer’s NI bill and therefore without any employer’s NI to pay you may benefit from a higher director salary.
You save more in Corporation Tax via this option.
The Personal Allowance for 2024/25 is £12,570, so we would suggest a monthly salary of £1047.
About this strategy:
- You protect your entitlement to future state pension and benefits
- If you have others on the payroll you may have to make tax and NI payments to HMRC each month, which is an additional admin burden and could impact your cashflow.
- You save a larger amount of Corporation Tax (approximately £2,388 to £3,142 depending on profits)
- You still have a £500 Dividend Allowance, for further tax-free withdrawals from the company.
- If you are a sole director, you won’t be able to claim the £5,000 Employment Allowance. This means a salary of £12,570 will cost you £478 in National Insurance.
3. Pay a higher salary of your choosing
Some people like to take a higher salary, for instance this works where the business may not have sufficient profits to pay guaranteed dividends, or for mortgage or visa requirements.
Whist you save Corporation Tax on the salary payments (19% to 25% depending on profits), you will be paying income tax, employee’s National Insurance and possibly employer’s National Insurance, which will almost certainly be greater than the Corporation Tax savings.
It’s not a route we recommend, but we are happy to discuss this, if you think it might suit your circumstances.
Rates and Thresholds in 2024/25
National Insurance (NI)
Description | Threshold |
Lower Earnings Limit (LEL)Salary above this qualifies towards State Pension | £6,393 |
Primary ThresholdThe point at which employees start paying NI on any earnings above the threshold | £12,570 |
Secondary ThresholdThe point at which employers start paying NI at a rate of 13.8% | £9,100 |
Upper Earnings Limit (UEL)Earnings above the Primary Threshold up to (and including) the Upper Earnings Limit incur NI at a rate of 8% | £50,270 |
Earnings above the Upper Earnings LimitSalary above this incurs NI at a rate of 2% | £50,271 |
Employment AllowanceEmployers can claim up to this amount to cover their employer’s NI. To be eligible there must be at least 1 employee or 2 directors on the payroll. | £5,000 |
Income Tax
The table below shows the income tax rates and band thresholds for 2024/25 in England, Wales, and Northern Ireland. Be aware that Scotland uses different tax bands and thresholds!
Tax Band | Tax Rate | 2023/24 |
| Personal Allowance*
| 0% | £12,570 |
| Basic Rate
| 20% | £12,571 – £50,270 |
| Higher Rate
| 40% | £50,271-£125,140 |
| Additional Rate
| 45% | £125,141 upwards |
* It is worth noting that income over £100,000 leads to a reduction in your personal allowance and for income over £125,140 the personal allowance is £nil.
Corporation Tax
From April 2023 Corporation Tax rates changed.
- There will be a small companies tax rate of 19% for profits under £50,000.
- Profits above £250,000 will be taxed at 25%
- In between there will then be an effective rate of tax of 26.5% (profits between £50,001 and £250,000)
Why is the effective rate of 26.5% higher than the main rate of 25%?
This is to ensure that when profits exceed £250,000 that 25% is charged on the full amount, for example:
- Profits of £250,000 taxed at 25% = £62,500
- First £50,000 taxed at 19% = £9,500
- Next £200,000 taxed at 26.5% =£53,000
- £9,500 + £53,000 = £62,500
Estimating your Corporation Tax liability within the year will be more complex from and therefore we urge you to save as much as you can towards this liability. The final Corporation Tax bill will be confirmed when your annual accounts and tax returns are prepared at the end of your Company’s financial year.
Dividend Tax
The amount of tax you pay on dividends depends on your total income, and how much of that income is specifically from dividend payments. The good news is that you don’t pay NI on dividends!
You can use allowances to reduce the amount of tax paid on your dividends. The first is any unused personal allowance (in 2024/25 this is £12,570) and then there is the dividend allowance. In 2024/25 this drops to £5,000.
The table below shows the tax rates for dividends for each tax bracket:
Tax Band | Tax Rate | Total Income |
| Dividend Allowance | 0% | £500 |
| Basic Rate | 8.75% | £12,571 – £50,270 |
| Higher Rate | 33.75% | £50,271-£125,140 |
| Additional Rate | 39.35% | £125,141 upwards |
Remember that dividends can only be paid out to shareholders where there are company profits. It’s important not to withdraw more money than is available, as you could be hit with an additional Corporation Tax charge (S445 @ 33.75%).
Salary / Dividend Illustration
In the illustration below we’ve demonstrated the maximum amount you can take in dividends, whilst remaining in the Basic Rate Threshold (where dividends are taxed at 8.75%), along with income level examples at £60k and £80k per annum.
2024/25 | Max Income to Basic Rate Tax Band £50,270 | Illustration based on £60k Income | Illustration based on £80k Income |
| Director’s Remuneration | £9,100 | £9,100 | £9,100 |
| Dividends using remaining Personal Allowance threshold (£12,570) | £3,470 | £3,470 | £3,470 |
| Dividends using Dividend Allowance | £500 | £500 | £500 |
| Dividends to Basic Rate Threshold (£50,270) | £37,200 | £37,200 | £37,200 |
| Dividends falling within the Higher Rate Threshold (>£50,270) | £0 | £9,230 | £29,230 |
| TOTAL DIVIDENDS | £41,170 | £50,900 | £70,900 |
| Total Gross Income | £50,270 | £60,000 | £80,000 |
| Tax on Dividends @ 8.75% | £3,255 | £3,255 | £3,255 |
| Tax on Dividends @ 33.75% | £0 | £3,115 | £9,865 |
| Total Tax on Dividends | £3,255 | £6,370 | £13,120 |
| Amount of tax to save monthly | £272 | £531 | £1,094 |
| NET CASH IN POCKET | £47,015 | £53,630 | £66,880 |
| Income kept % | 93.5% | 89.4% | 83.6% |
- This assumes there is no income from any other source
- Dividends are either paid or declared between 6th April 2024 and 5th April 2025
- You are on a standard 1257L tax code (not on a Scottish tax code)
- You don’t have a contract that falls within IR35
- The company has sufficient profits (after Corporation Tax) to declare dividends at the required level
- There is a PAYE scheme in place
Remember, that in addition to the tax due for 2024/25, payments on account will be required for the 2025/26 tax year. 50% payable in January 2025 and 50% payable in July 2025 – based on the previous year’s tax bill.
Other Tax Planning Options
You might want to consider the following, for efficient tax planning in the year ahead, if you haven’t already done so:
- Your company can claim the cost of your salary when it calculates its Corporation Tax. As a result, it will save Corporation Tax at up to 25% on any salary taken.
- Company contributions into your Pension Scheme and having a Relevant Life Cover policy in place will also save up to 25% in Corporation Tax.
- The company can pay up to £500 for Pensions Advice.
- Beware of the high-income tax benefit charge if you claim Child Benefit payments and you or your partner earn over £60k, as you could end up paying this back to HMRC!
- Remember to claim for reimbursement of all legitimate business expenses.
- Don’t forget your Trivial Benefits! (http://a4cgroup.co.uk/trivial-benefits/)
- Unlike sole traders, the company does not have to pay out all available profits at one time – dividends can be managed to minimise your personal tax liability and any retained earnings left in the business, when you’re ready to close, may be eligible for Business Asset Disposal Relief (previously known as Entrepreneurs Relief) which is taxed at 10%.