How should a single company director, with employees, pay themselves from their LTD company?
As a director of a limited company, determining the most efficient method to pay yourself is crucial not only for personal financial benefit but also for optimising your company's tax efficiency. A widely recommended approach involves a combination of salary and dividends. Here, we detail how you can implement this effectively.
Optimal Salary: £1,048 Per Month
For the 2024/25 tax year, the most tax-efficient salary for a company director, with employees, is £1,048 per month. This amount ensures that you accrue credits for state pension and benefits without the requirement to pay Employee National Insurance contributions. Employer National Insurance Contributions will be payable by the company, however these will be offset by the £5,000 employment allowance available each year.
Paying yourself a salary of £1,048 per month equates to £12,570 annually. This is equal to the personal allowance threshold of £12,570, meaning you will not owe any income tax on this salary.
Complementing with Dividends
Once your salary is established, you can enhance your income with dividends. Dividends are payments made to shareholders from the company's retained profits and are taxed at a lower rate than salary, thereby providing a tax-efficient means of extracting income from the company.
Understanding the Dividend Allowance: For the 2024/25 tax year, you can receive £500 of dividends free of tax under the Dividend Allowance.
Dividend Tax Rates: Beyond the £500 allowance, the dividend tax rates for the 2024/25 tax year are:
8.75% for dividends within the basic rate tax band (up to £50,270, including your salary and dividends)
33.75% for dividends within the higher rate tax band (£50,271 to £150,000)
39.35% for dividends above the additional rate threshold (over £150,000)
How much take home pay do you need monthly?
Below we’ve included a table, which showcases various monthly take home amounts, and the personal tax implications of each for basic rate tax payers.
Under normal circumstances you’ll be provided with a payslip from us (or your accountant), for the monthly salary, and you will also be able to make a bank transfer for the dividends to your personal bank account. Some funds will need keeping aside until the end of the tax year, for the tax on the dividends, payable via your self-assessment.
For example, if you require a take home salary of £2,500, the company would send you, £1,048 in one transfer for salary, and £1,588 in another transfer for dividends. From the £2,635, save £135 personally for your end of year tax bill, leaving you with the desired £2,500.
Key Considerations
Company Profits: Ensure the company has sufficient retained profits from which to distribute dividends, as dividends cannot be legally paid from future earnings or borrowed money.
Documentation: Keep accurate documentation for dividend distributions.
Tax Updates: Stay informed about changes in tax rates and allowances each tax year, these figures apply for 2024/25 but will change each year.
Professional Advice: It is always advisable to consult with an accountant or tax advisor to customise this strategy to your specific circumstances, particularly if your financial needs or company profits are considerably higher.
By adopting this strategy of a sensible salary and the strategic use of dividends, you can optimise both your personal and company tax positions, ensuring efficient and compliant financial management.