Director's Income

It’s a good idea to take at least a small salary as a director. This mean adding yourself to your company’s payroll.

Benefits of taking part of your income as salary:

• You build up qualifying years towards your state pension
  
  

• You can contribute to personal pension contributions
  
  

• You can retain maternity/paternity benefits
  
  

• You can still apply for lending, such as mortgages, loans and insurance policies such as critical illness cover
  
  

• You reduce the amount of corporation tax that your company pays (as PAYE salary is an allowable business expense)
  
  

• You can take a salary even if your business makes no profit
  
  

Drawbacks to taking a salary

• Taking a salary means that both you and the company have to pay National Insurance contributions
  
  

• A salary also attracts higher rates of income tax than a dividend does
  
  

How much salary to take

You don’t pay income tax on your earnings up to the personal allowance (currently £12,570 in the 2022/23 tax year). However, you will have to pay national insurance contributions if your income passes the primary threshold (currently £12,570). In addition, employer national insurance contributions become payable on any employee earnings above £9,100.

State Pension

To qualifying for the state pension, your salary must be at or over the NIC Lower Earnings Limit (currently £6,396). Some directors set their salaries between the Lower Earnings Limit and the primary threshold, so as to keep their state pension but avoid paying national insurance contributions.

Directors can choose to take the majority of their income in the form of dividends. This is usually considered as more tax-efficient.

What are dividends?

A dividend is a share of the company’s net profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid. You cannot claim dividends if your company is limited by guarantee.

Dividends can be paid to directors and other shareholders, subject to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them. A company can retain profits over a number of years and distribute them as the board decides.

The benefits of taking dividends

• Dividends are taxed at lower rates of PAYE salary

• National insurance contributions are not payable on dividends (neither employer’s nor employee’s)

By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.

Your dividend allowance

You have a tax-free dividend allowance,. This is additional to your personal allowance. In the 2022/23 tax year this allowance is £2,000. This means that you can earn up to £14,570 before paying any income tax at all.

The dividend allowance for 2023/24 lowered to £1,000.

Income tax rates on dividends

Dividends attract a much lower rate of income tax than PAYE salary does. There is a greater tax-free allowance when you are paid in dividends. Between £14,570-£50,000, the dividend tax rate is 8.75%, whereas for salary between £12,570-£50,270, the tax is 20%.