Most Tax-Efficient Director Salary for 2024/25
As a company director, paying yourself a tax-efficient salary is crucial to maximising take-home pay while minimising tax liabilities. With the 2024/25 tax year in full swing, here’s how to structure your income for optimal tax efficiency.
Key Considerations
When deciding on a director’s salary, you must consider several factors, including:
- Income tax thresholds
- National Insurance Contributions (NICs)
- Corporation tax savings
- Dividend tax rates
Optimal Salary for Directors
The most tax-efficient salary for a director depends on whether you have other sources of income and whether your company is eligible for the Employer’s National Insurance Allowance (EIA).
Scenario 1: If the Employer’s NI Allowance Applies
The EIA is available to most businesses that have more than one employee on the payroll and can reduce the employer’s NIC liability by up to £5,000 (to increase to £10,500 in 25/26 tax year).
- Tax-free Personal Allowance: £12,570
- Primary NIC Threshold: £12,570
- Employer NIC Threshold: £9,100
- Recommended Salary: £12,570 per year (£1,047.50 per month)
- No Income Tax is payable as it is within the Personal Allowance.
- No Employee NICs are due.
- Employer NICs are due on the excess over £9,100 but can be offset by the EIA.
Scenario 2: If the Employer’s NI Allowance Does Not Apply
If your company is ineligible for the EIA (e.g., if you are the sole employee and director), a different approach may be more tax-efficient.
- Recommended Salary: £9,100 per year (£758.33 per month)
- Below the Employer’s NIC threshold, meaning no NICs are due.
- Qualifies as a ‘paid’ salary for state pension contributions.
- Any additional income should be taken as dividends to remain tax-efficient.
Taking Dividends
Once you have paid yourself the optimal salary, the remainder of your income can come from dividends. In 2024/25:
- The tax-free dividend allowance is £500.
- Dividends are taxed at:
- 8.75% (Basic rate: Up to £50,270 total income)
- 33.75% (Higher rate: £50,271 – £125,140 total income)
- 39.35% (Additional rate: Above £125,140 total income)
- Dividends are not subject to NICs, making them a tax-efficient way to extract profits.
Example of a Tax-Efficient Pay Structure
A company director aiming to take home the most income with minimal tax could structure their pay as:
- Salary: £12,570 (if EIA applies) or £9,100 (if not)
- Dividends: Up to £37,700 (keeping total income within the basic rate band)
This results in minimal income tax and NICs, while still maintaining entitlement to state benefits.
Expenses and benefits: income tax paid on directors’ behalf: Overview – GOV.UK
National Insurance for company directors – GOV.UK
Final Thoughts
Choosing the most tax-efficient salary requires careful planning. Always consider your individual circumstances, potential future tax changes, and whether your business qualifies for employer reliefs. Consulting with an accountant can ensure you optimise your tax position while remaining compliant with HMRC regulations.