As a director of a limited company, paying yourself isn’t as straightforward as withdrawing money from your business bank account. There are several tax-efficient ways to take an income while keeping your business compliant with HMRC. Here is a simple guide to help you understand your options for paying yourself as a director of a UK company.
Salary: A Common Way Directors Get Paid
Taking a salary from your limited company is one way to pay yourself. However, to keep things tax-efficient, many directors set their salary at or below the National Insurance threshold. This strategy is part of a broader approach to tax-efficient income for company directors. Here’s what that can mean:
- No personal tax to pay if it stays within your personal allowance (£12,570 for 2024/25).
- No National Insurance contributions if it remains below the secondary threshold (£9,100 for 2024/25).
- Still qualifying for state benefits, including State Pension, if it’s above the lower earnings limit (£6,396 for 2024/25).
This makes a salary an effective base for your income strategy.
Dividends: A Tax-Efficient Option
Dividends are one of the best ways to pay yourself from a limited company. They are paid from after-tax profits, so your company must have enough retained earnings to distribute them. You must also be a shareholder to receive dividends.
The dividend tax rates for the 2024/25 tax year are:
- 0% on the first £500 (dividend allowance)
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Dividends must be formally declared with proper records, such as board meeting minutes and dividend vouchers. Combining dividends and salary is a popular director remuneration strategy in the UK.
Pension Contributions: Long-Term Planning
Another tax-efficient option for limited company directors is having your company contribute to your pension. These payments are an allowable business expense and can reduce your corporation tax bill. At the same time, they help you build your retirement savings. This is an often-overlooked benefit when planning around paying yourself as a director.
Other Benefits & Reimbursements
Your limited company can also offer non-cash benefits, which can be both practical and tax-free:
- Mileage and travel expenses for business-related journeys
- A company mobile phone
- Trivial benefits (non-cash gifts up to £50)
These perks add flexibility and help you get more from your business income without increasing your tax burden.
What’s the Best Way to Pay Yourself from a Limited Company?
Most directors choose a combination of a low salary (to stay within tax-free thresholds) and dividends (to top up income). This approach is widely recognised as the best way to pay yourself from a limited company. However, the right mix depends on your personal tax position, profit levels, and financial goals.
Understanding HMRC rules for paying yourself as a director and staying compliant is key. Working with an accountant ensures you’re using the most tax-efficient methods for your situation.
Need tailored advice on director salary and dividends?
Contact Crossley & Davis today for expert guidance on the most tax-efficient way to pay yourself as a limited company director in the UK!
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