Paying yourself a limited company director salary

Figuring out your limited company director salary can feel a bit overwhelming when you’re just starting out – how much should you pay yourself, and what’s the most tax-efficient way to do it? All great questions, and we’re here to answer them.

In this guide, we’ll break down how director salaries work, explore the most tax-efficient options, and show you how to combine different income streams (like dividends and pension contributions) to make the most of your money. 💸

What is a director’s salary?

As a director of a limited company, you’re technically an employee. So, if you want to pay yourself a limited company director salary, you’ll do it through PAYE (Pay As You Earn), just like any other employee.

But unlike a typical employee, you probably also own shares in your company, which means you can pay yourself through dividends, too.  👀

So your income might look like this:

So, what’s the most tax-efficient salary for directors?

There is no one-size-fits-all limited company director salary, but most directors choose between two main options depending on how they’re set up.

Option 1: A lower salary 

Some directors choose to pay themselves a salary that stays below the thresholds for Income Tax and National Insurance, but still qualifies for state pension credits.

This can be especially tax-efficient if your company isn’t eligible for the Employment Allowance, which exempts you from paying employers’ National Insurance (NI) in certain situations.

You’ll typically pay no tax or NI, but still build up some state pension credits. 🏦

Option 2: A salary that uses up your full Personal Allowance

This option makes full use of your tax-free Personal Allowance and means you’ll:

• Still avoid Income Tax
• Pay a small amount of National Insurance (unless the Employment Allowance applies) 
• Reduce your Corporation Tax bill because salary is a deductible business expense

But wait, how do I know if I can claim Employment Allowance?

You can claim Employment Allowance if:

Option 2 involves a little admin, but it’s more tax-efficient if your company can make the most of an Employment Allowance. 💥

Are dividends part of your salary?

No, dividends aren’t included in your limited company director salary. But they can be used to supplement your annual income as a director. 📅

Dividends are payments made from your company’s post-tax profits to shareholders. You can only take dividends if your company has enough profit left after paying Corporation Tax.

Here’s a quick breakdown of the tax rates depending on your dividend amount:

Dividends are taxed more lightly than a salary, which is why many directors combine the two.

Can I reduce tax by contributing to a pension?

Yes! In fact, pension contributions are one of the most tax-efficient ways to boost your take-home from a limited company director salary. 💪

Here’s why:

If you’re earning more than you need day-to-day, putting some of it into your pension is a great way to save for the future and cut your current tax bill.

Other ways to stay tax-efficient

Here are a few more strategies to consider:

Everyone’s financial situation is different, so it’s worth getting advice before you make any big decisions.

Do I have to pay myself anything? 

Technically, no. But taking at least a small limited company director salary means:

• You’ll build up state pension entitlement
• HMRC knows you’re still actively running the business 🕵️‍♀️

So even if things are slow, it’s a good idea to keep some pay flowing, and adjust it as the business grows. 📈

Making sense of your salary

Sorting your limited company director salary isn’t just a tick-box exercise. You’ve got options, and with the right mix of salary, dividends, and pension contributions, you can make your income work harder (and keep more of it, too). 🙌