As a company director, you have more ways to pay yourself than a sole trader to save money on your tax bill, but knowing how to do it can be complicated. To help you understand your options, we’ve written up this article. You’ll learn about how most company directors pay themselves and how you should balance salary and dividends to maximise tax efficiency.
Paying yourself as a company director
Company directors can pay themselves through four main methods: salary, dividend payments, a director’s loan, and reimbursement of expenses. The most popular method is to take a mix of salary and dividend payments.
Tax due on salaries and dividends
A mix of salary and dividend payments is so popular because it offers significant tax savings. Dividends are taxed less harshly than regular income in two ways.
First, as we can see from the table below, dividends are subject to a lower tax rate than regular income like salaries—this is true for each tax band.
| Tax bands | Income tax rate | Dividend tax rate |
| Basic rate | 20% | 8.75% |
| Higher rate | 40% | 33.75% |
| Additional rate | 45% | 39.35% |
* Scotland has a different system for income tax. Check Scotland’s income tax regime.
You just need to remember that the tax-free allowance for dividend tax is extremely lower than that for income tax—£500 compared to £12,570 (2024/25).
Second, National Insurance Contributions (NICs) are not due on dividend payments, but they are on salaries.
As of the 2024/25 tax year, the Class 1 employee NICs rate is 8% for salaries between £12,570 and £50,270. The portion of your salary that exceeds the upper limit will be taxed at 2%. Your company will also have to pay Class 1 employer’s NICs at 13.8% on salary income above £9,100.
You might be thinking, ‘What mix of salary and dividends should I take?’. Let’s answer that for you.
What is the ‘right’ mix of salary and dividend payments?
To answer this question, you should understand two aspects of NICs:
- Lower earning limit. To get the state pension, you must earn above the NICs lower earnings limit, which is £6,396 per year as of 2024/25.
- Secondary threshold. If you exceed this threshold, you start paying Class 1 employer’s NICs (13.8%). This is currently £9,100.
This system offers an opportunity: if you pay yourself a salary that is above the lower earnings limit but below the secondary threshold, you will accrue the benefits of National Insurance without actually paying any NICs. You’ll also pay no income tax as your salary will be below the personal allowance for income tax.
Are there advantages to paying yourself a high salary?
Sometimes, paying yourself a high salary rather than relying on dividends can benefit you. Consider these so you can make an informed decision.
- Predictable income. Earning a salary provides a predictable and steady income stream.
- Mortgage and loan applications. Lenders tend to prefer a steady income stream, so a ‘regular’ salary can make qualifying for mortgages and loans easier.
- Pension contributions. Your net relevant earnings dictate the amount of pension tax relief you’re entitled to. As dividends don’t count as relevant earnings, the amount of pension tax relief you’re entitled to may be lower than you expect.
If you would like to discuss your earnings with a professional tax adviser, get in touch with us today. We’ll advise you so you can take home as high a pay as possible.