As a director, you’ve got two main ways to take money from your company: salary and dividends. Each works differently and gets taxed differently, so getting the balance right matters.
Salary comes off as a business expense before your company pays Corporation Tax. This means your company pays less tax because of your salary. But salaries also mean National Insurance costs once you go above certain thresholds – both for you and your company.
Dividends work differently. They can only be extracted from profits after your company has paid Corporation Tax. While you can’t claim them as a business expense, dividends often mean paying less tax personally because dividend tax rates are lower than income tax rates.
Most directors use a mix of both. The trick is finding the right balance that works for your situation. This became even more important after the recent Autumn Budget announced major changes starting April 2025.
This guide will help you understand your options and plan the most tax-efficient way to pay yourself, both for now and after the new rules kick in.
The Autumn 2025 Budget
The recent Autumn Budget brought major changes to how company directors should structure their pay from April 2025. While this guide covers current rules for 2024/25, these upcoming changes will affect how much salary you should take.
From April 2025, we’ll see:
- Employer’s National Insurance rising to 15% (from 13.8%)
- The employer NICs threshold dropping to £5,000 (from £9,100)
- Employment Allowance doubling to £10,500 (from £5,000)
What this means for you
- If you qualify for Employment Allowance, you could take a higher salary as the doubled allowance covers more NICs
- If you don’t qualify, you might want to reduce your salary to £5,000 to avoid the new 15% rate
- The changes affect whether it’s worth paying above the NICs threshold at all
- You’ll need to review your salary and dividend mix before April 2025
How Dividends Have Changed Over Time
The dividend allowance, which permits you to receive a certain amount of dividend income tax-free, has been steadily reduced over the past few years.
For the 2024/25 tax year, the allowance stands at just £500. Once you exceed the £500 dividend allowance, any further dividend income will be taxed at the following rates:
- Basic rate taxpayers (up to £50,270 of taxable income): 8.75%
- Higher rate taxpayers (£50,271 to £125,139 of taxable income): 33.75%
- Additional rate taxpayers (over £125,140 of taxable income): 39.35%
Understanding Employment Allowance for directors
From April 2025, Employment Allowance (EA) will become even more valuable for company directors.
This government scheme will let eligible employers reduce their National Insurance bill by up to £10,500 per year, which is double the current amount.
For many directors, this change will completely transform how they should structure their pay.
What is Employment Allowance?
Employment Allowance cuts your company’s employer National Insurance bill. Think of it as a discount that makes it cheaper to employ people, including paying director salaries.
This matters because employer’s National Insurance is a major cost for companies – from April 2025, you’ll pay 15% on salaries above £5,000.
The allowance works by reducing your National Insurance bill each month until you’ve used it up. For example, if your monthly employer’s NI bill is £500, the allowance would cover this completely for 21 months with the new £10,500 limit.
This is particularly important for directors because it can make taking a higher salary much more cost-effective. Without EA, you might keep your salary low to avoid employer’s NI. With it, you could take a much higher salary without these extra costs.
Can Your Company Claim EA?
The rules around claiming Employment Allowance are specific. You need to meet several conditions, and it’s worth understanding each one properly.
First, you need either:
- Two or more directors on payroll, or
- One director plus at least one employee
- Each person to earn above £5,000 yearly (this threshold drops from April 2025)
- Total employer NI bill under £100,000 from the previous year
- To be running a genuine business operation
How EA Changes Your Salary Choices
The impact of Employment Allowance on your salary decisions is substantial. Let’s look at how it affects your choices.
With Employment Allowance (from April 2025), taking a higher salary becomes much more attractive.
Here’s why:
- The doubled allowance of £10,500 covers much more employer’s NI
- You could take up to £12,570 salary with NI costs covered
- The company still gets full tax relief on the salary
- You have more flexibility with staff salaries too
Choosing Your Most Tax-Efficient Salary
With significant changes announced in the 2024 Autumn Budget, how directors structure their pay from April 2025 needs careful consideration.
Here are your three main options for taking a director’s salary updated for 2025:
Option 1: Low Salary Plus Dividends (£5,000)
From April 2025, the lowest practical salary for directors becomes £5,000 (£416.67 monthly). This is where the new employer’s NICs threshold sits, meaning it’s the highest salary you can take without your company paying any National Insurance.
At this level, things are quite straightforward. Your company pays you £5,000, and that’s exactly what it costs – no extra NICs to worry about. You’ll still build up your State Pension entitlement, and your company gets Corporation Tax relief on the full amount. This relief means the real cost to your company is less than £5,000, as it pays less tax because of your salary.
Let’s make this really clear with a real example. Say you want £50,000 total income this year. With a £5,000 salary, you’d need £45,000 in dividends to reach your target. Your first £500 of dividends is tax-free, and the rest gets taxed at just 8.75% if you stay within the basic rate band.
Advantages of This Strategy
The main advantages:
- Lowest possible fixed costs for your company
- Very simple to manage and calculate
- Maximum flexibility with dividend payments
- Minimal National Insurance costs
Drawbacks
But there are important drawbacks:
- You need enough profit to pay substantial dividends
- Your income is less predictable
- Most of your Personal Allowance goes unused
- Banks and mortgage lenders often prefer to see higher salary
- You’re very dependent on company performance
- Less pension contribution capacity
Option 2: Mid-Level Salary Plus Dividends (£8,000)
Taking £8,000 salary (£666.67 monthly) represents a middle ground that many directors choose. You’re going a bit above the new employer’s NICs threshold, which means some National Insurance costs, but you’re using more of your Personal Allowance while keeping costs manageable.
Here’s how it works in practice. Your company pays you £8,000 salary, plus some employer’s NICs on the amount above £5,000. With the new 15% rate, that’s £450 in employer’s NI. Your company gets Corporation Tax relief on both the salary and the NICs, effectively reducing the real cost. Meanwhile, you’re still below the employee NI threshold, so you won’t pay any personal National Insurance.
Let’s look at that £50,000 total income example again. With £8,000 salary, you’d need £42,000 in dividends. You get your £500 tax-free dividend allowance, and the rest is taxed at 8.75% within the basic rate band. This gives you a bit more predictable income than the lower salary option.
Advantages of This Strategy
The main advantages of this strategy include:
- Better balance between salary and dividends
- More of your Personal Allowance used
- Still relatively low fixed costs
- More appealing to mortgage lenders
- Higher pension contribution capacity
Drawbacks
But consider these drawbacks:
- Company pays some employer’s NICs
- Still need significant profits for dividends
- More complex calculations needed
- Higher fixed monthly costs
- Less flexibility than the minimum salary route
Option 3: Maximum Tax-Efficient Salary with EA (£12,570)
This option really comes into its own from April 2025 when Employment Allowance doubles to £10,500. At £12,570 (£1,047.50 monthly), you’re using your full Personal Allowance as salary while the Employment Allowance covers your employer’s NICs.
Here’s how it works. Your salary costs the company £12,570 plus employer’s NICs on the amount above £5,000. That NI would normally be £1,135 at the new 15% rate, but Employment Allowance covers it completely. Your company gets Corporation Tax relief on the whole amount, making this very tax-efficient. You pay no income tax as you’re within your Personal Allowance, and the Employment Allowance means no real NI cost.
For that £50,000 total income, you’d now only need £37,430 in dividends. This means less dividend tax overall, and a much more predictable monthly income.
Advantages of this Strategy
The main advantages:
- Makes full use of your Personal Allowance
- Most predictable monthly income
- Highest basic earnings for mortgage applications
- Maximum pension contribution basis
- Less reliance on company profits
- Lowest overall tax bill if you qualify for EA
Drawbacks
But consider these drawbacks
- Must qualify for Employment Allowance
- Highest fixed monthly costs
- Less flexible than other options
- Needs careful planning to maintain EA eligibility
- Still need enough profits for dividend top-ups
- Uses more of your EA, leaving less for other staff
What Happens at Higher Dividend Levels?
If you require more income and take dividends beyond the basic rate band, your tax liability increases. Dividends above the basic rate threshold are taxed at 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
This is still often more tax-efficient than paying yourself a higher salary, but careful planning is required to avoid unexpectedly higher tax bills.
Timing Your Dividend Payments
The timing of when you take your dividend payments will also impact your overall tax liability.
By carefully planning the timing of your dividends, you can ensure you fully utilise your personal allowance and remain within the basic rate tax band for as long as possible.
Here’s how it works:
Your personal allowance is £12,570 (for the foreseeable future). This means you can earn up to £12,570 in total income before paying any income tax.
The basic rate tax band covers taxable income up to £50,270. Within this band, dividends are taxed at 8.75%.
If you anticipate your total income (salary plus dividends) will exceed the basic rate tax band in a given tax year, you may want to consider delaying some of your dividend payments to the following year.
For example, let’s say your total income for the 2024/25 tax year is projected to be £60,000.
By deferring £10,000 worth of dividends to the 2025/26 tax year, you can ensure that £50,270 of your income is taxed at the basic rate of 8.75% rather than the higher rate of 33.75%.
The Role of Accountants in Maximising Your Salary
Want to take the most tax-efficient director’s salary you can? Professional help pays off.
Working with a team of chartered accountants can be invaluable in ensuring you implement the most tax-efficient strategies for your unique circumstances.
At Double Point, our experts truly understand the latest tax laws and regulations, including the Employment Allowance and its eligibility criteria.
We can provide personalised guidance to help you:
- Determine your company’s eligibility for the Employment Allowance
- Calculate the optimal director’s salary to maximise the allowance
- Develop a strategic plan to combine salary and dividends effectively
- Identify and claim all applicable tax deductions and reliefs
- Implement effective tax planning strategies, such as pension contributions
- Ensure full compliance with HMRC requirements and avoid penalties
By partnering with us, you can be confident that you’re taking home the maximum amount of your hard-earned profits while staying within the law.
Get in touch with us today to discuss how we can help you maximise your take-home pay.
