For owners of limited companies, it’s important to take money from your company as tax-efficiently as possible.
It’s great to be in charge of your own salary! But what does this involve?
Traditionally, a combination of two main options is used:
- taking a director’s salary through PAYE, and
- withdrawing shareholder dividends (when company profits allow).
PAYE payments
A regular salary paid via a payroll scheme provides regular income, taxed at source, and a state pension record. Your salary is a tax-deductible business expense, so the amount you pay yourself as a director does not incur corporation tax.
Your company needs to pay employer’s National Insurance if your salary exceeds a certain amount. For the tax year 2024/25, this involves a threshold of £175 per week or £758 per month. Earnings exceeding this level incur a 13.8% employer’s National Insurance (NI) contribution.
Owners of limited companies often take salary payments up to the employer’s NI threshold and withdraw additional funds as dividend payments. The tax efficiency of this approach depends on two aspects: the number of shareholders and the tax-free allowance of dividends.
Dividend Allocation
This is an attractive way of taking money from your limited company as no NI contributions are involved and the dividend tax rate is usually lower than your income tax rate. You can only withdraw dividends from your company if sufficient profits are available.
The tax-free dividend allowance for 2024/25 is £500. This is significantly lower than in recent years. The tax rate payable on dividend payments above £500 is 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Each dividend payment involves a formal declaration and voucher. (Explore our information about dividends in more detail here.)
Importantly, dividend payments reflect the number of shares owned (you may have the only one!). All shareholders receive payment from a dividend allocation.
Achieving optimum tax efficiency
‘With the reduced tax-free allowance of dividends, limited company owners should review how they withdraw money from their business to ensure it’s the most tax-efficient option,’ advises Suzanne Spicer of family-run Spicer & Co Chartered Accountants in Dunstable. ‘The popular blend of salary and dividend payments may still be the best option, however it’s important to know you’re operating as tax-efficiently as possible.’
Suzanne adds: ‘For example, for some company owners it could be best to take salary up to the personal allowance, currently £12,570pa. This approach incurs NI but also offers a corporation tax saving. It’s always best to check with your accountant, especially as the new NI rates applicable from 6 April 2025 may mean a different approach becomes favourable.’
Are you an owner of a limited company?
Explore whether your payment arrangements minimise your tax liability. Talk to the friendly experts at Spicer & Co. Enjoy an initial discussion without obligation. We’d love to save you money!