Tax-Efficient Director’s Salary and Dividends Strategy for 2024/25
As the director of a limited company, it is crucial to understand the most tax efficient way to structure your income. The 2024/25 tax year brings some changes that directors should be aware in order to minimise their tax liability and maximise pay.
Considering the ideal combination of salary and dividends, you should be mindful of tax considerations and the effect of National Insurance Contributions.
Key Tax Rates and Allowances for 2024/25
Personal Allowance - £12,570
Dividend Allowance - £500
Basic Rate - £12,571 to £50,270
Higher Rate - £50,271 to £125,140
Additional Rate - Over £125,140
The dividend allowance for the 2024/25 tax year is £500 meaning that the first £500 is tax free. However, dividends above this allowance will be subject to dividend tax. The relevant rates are:
Basic rate - 8.75% up to £50,270
Higher rate - 33.75% between £50,271 to £125,139
Additional rate - 39.35% over £125,140
Then a director’s salary is the regular income you would pay yourself and it is essential for tax efficiency and qualifying for state benefits. Directors can use their personal allowance by taking a salary of £12,570 and ensuring a complete record for National Insurance purposes.
A salary above £9,100 will accrue Employer’s National Insurance contributions, that is the Secondary Thresshold amount above which employers start paying contributions. Therefore a director with a salary of £12,570 will incur additional costs for the employer. Unless your company is eligible for the Employment Allowance then a tax efficient director’s salary for a sole director would be £9,096.
The Employment Allowance allows your company to claim a reduction of up to £5,000 of your National Insurance contributions costs, that is if you have other employees on your payroll. Sole director companies are not eligible for this allowance.
When combining salary and dividend, you should be aware that dividend income is not subject to National Insurance contributions. In additional dividend income is taxed at lower rates compared to salaries.
Therefore, a modest salary and dividends up to the basic rate threshold contrinues to be one of the most effective combinations.
