Director's Income

Toolkit Contents

Home | Financial Business Planning | Finance Business Records | Business Development | Help with Business Debt


Financial Business Planning

> Document Retention

> Self-employed records
> Companies registered with Companies House
> Inspection of records
> Digital Receipts
        > Making Tax Digital
        > Benefits of Digital Receipts
        > Free Digital Records Storage



Suggest a topic to add

Contents

Overview

Directors of limited companies usually pay themselves a combination of PAYE salary and dividends, sometimes with pension contributions from the company. Choosing the right income combination depend on a number of factors, such as:

Taking PAYE salary

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:

Drawbacks to taking a salary

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.

Taking director dividends

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



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%.

Pension Contributions