Managing your income can be tricky as a limited company director. Knowing the best tax-efficient ways to handle earnings is important to follow tax rules and maintain financial stability. Several options are available, such as direct salary payments, dividends, pension contributions, business expense deductions, and other financial strategies. These methods can help professionals reduce their tax bills and increase their profits.
Why Structure Your Pay Efficiently?
Running a limited company lets you choose how you get paid. Unlike sole traders, company directors can mix their income between salary, dividends, and other payment methods. This approach helps you follow HMRC rules while saving on taxes, lowering National Insurance contributions (NICs), and improving cash flow.
A good pay strategy can:
- Lower personal and business taxes.
- Make sure you qualify for state benefits.
- Keep your business financially stable.
- Cut down on unnecessary taxes and avoid fines.
- Strengthen financial planning for business growth.
- Offer flexibility in handling personal income and investments.
- Enable better wealth management and retirement planning.
- Boost cash flow and reinvestment opportunities in your business.
Different Ways to Pay Yourself from a Limited Company
1. Salary – The Traditional Route
A salary is a simple way for a director to pay themselves. It goes through the company’s payroll and is subject to PAYE tax deductions and National Insurance contributions.
Benefits of Taking a Salary
- You can get state benefits like the State Pension.
- It counts as a business expense, lowering the company’s Corporation Tax.
- It offers financial stability with a steady monthly income.
- It helps you get loans and mortgages because lenders prefer salaried income.
- It makes it easier to manage pension contributions through employer payments.
- It ensures the company follows minimum wage laws if you are employed there.
Drawbacks of Taking a Salary
- Subject to both Income Tax and National Insurance.
- Higher taxes than dividends.
- Needs PAYE registration and payroll management.
- Can raise employer National Insurance costs for the company.
- May lower business profits if not set up properly.
Tax-Efficient Salary Threshold
Many directors keep their salary at the personal allowance limit of £12,570 for the 2024/25 tax year or just below the National Insurance primary threshold to reduce National Insurance contributions while still earning state pension benefits.
Some directors choose a slightly higher salary to gain extra tax benefits like employer pension contributions.
Bonuses or employee benefits can help improve tax planning while ensuring a steady income.
2. Dividends – A Tax-Efficient Alternative
Dividends are a common way for company directors to pay themselves. They are taxed at lower rates than salaries and do not require National Insurance contributions.
How Dividends Work
- Dividends can only be paid from the company’s profits after taxes.
- Dividends are taxed at lower rates than regular income.
- You need proper paperwork, like dividend vouchers and board meeting notes.
- Dividends offer flexibility in income based on how well the business is doing.
- They allow for tax-efficient withdrawals compared to salary payments.
- The ability to pay dividends depends on the company’s retained profits, which can limit options if the business isn’t making money.
Dividend Tax Rates (2024/25)
- £0 – £500 – 0% (Dividend Allowance)
- Basic Rate (up to £50,270 total income) – 8.75%
- Higher Rate (£50,271 to £125,140 total income) – 33.75%
- Additional Rate (over £125,140 total income) – 39.35%
Dividends can save you money on taxes but rely on profits and may not always provide a steady income. They must be shared fairly among shareholders, and taking too many dividends in a year with losses can cause problems with HMRC.
3. Combining Salary and Dividends – The Best of Both Worlds
Most directors adopt a hybrid approach: a low salary (below NIC thresholds) to maintain eligibility for state benefits, supplemented with dividends to minimise tax liabilities.
Example Tax-Efficient Pay Structure
| Component | Amount (£) | Tax Treatment |
| Salary | £12,570 | Below Personal Allowance, No Income Tax |
| Dividends | £50,000 | Taxed at 8.75% in Basic Rate |
| Total Income | £62,570 | Efficient Tax Planning |
This method lowers Income Tax and NICs while following HMRC rules. It also balances steady income with tax savings.
4. Director’s Loan – Borrowing from the Business
Directors can take loans from their companies using a director’s loan account (DLA), which tracks money transactions between the director and the company.
Key Considerations
- Repayment: There is no extra tax if you repay the loan within 9 months after the financial year ends.
- Tax Implications: If the loan is more than £10,000, it counts as a benefit-in-kind, which means you must pay personal tax and employer NICs.
- Company Tax: If the loan isn’t repaid, the company faces a 33.75% tax charge, which can be reclaimed once the loan is paid back.
- Interest Rate: Charging interest lower than HMRC’s official rate may lead to extra tax costs.
- Avoid Overuse: Using director’s loans too often may cause HMRC to investigate.
5. Pension Contributions – Tax-Efficient Retirement Planning
A company can help pay for a director’s pension scheme, providing good tax benefits.
Benefits of Pension Contributions
- No National Insurance Contributions (NICs) or Income Tax on the contributions.
- Corporation Tax relief on contributions up to the annual limit (£60,000 for 2024/25).
- Supports long-term financial security and wealth growth.
- Promotes organised planning for retirement.
- Fits into a broader wealth management strategy.
- Enables significant tax-free growth of investments over time.
6. Business Expenses and Benefits
You can claim some expenses and benefits as business costs, reducing your taxable profits and improving your personal pay.
Examples of Tax-Deductible Expenses
- Company car (if low-emission)
- Home office costs
- Mobile phone bills
- Professional development & training
- Travel and accommodation (for business trips)
- Health insurance (if provided to all employees)
- Employee entertainment (within certain limits)
- Marketing and advertising costs
- Professional subscriptions and memberships
- Software and IT expenses
- Charitable donations for tax relief
Maximising Your Earnings – The Smart Way Forward
You must plan for taxes and follow HMRC rules to pay yourself from a limited company. Using a mix of salary and dividends is often the best way for directors to save on taxes. To improve your earnings and cash flow, you can also consider pensions, director’s loans, and expense claims.
Need help? Clarkwell & Co. Chartered Accountants focuses on helping business owners pay themselves tax-efficiently. Our experts provide advice on salary, dividends, and tax strategies to ensure you follow UK tax laws while maximising your income. We offer customised tax solutions that fit your financial goals and business needs.
Contact us today to find the best way to manage your income.
