Dividends and Directors Salary: A Financial Analysis
Dividends and Directors Salary: A Financial Analysis
Melissa Deacon
Directors’ Salary:
What is a ‘directors’ salary’?
When setting up a limited company, one of the benefits is the fact that you as a director are legally separated from the business. As a result, you’re not allowed to simply take all the profits from the limited company, but you do have the flexibility in deciding how to pay yourself.
The most tax efficient way to pay yourself is usually by paying yourself a salary under the limited company, whilst also taking advantage of dividend payments – this salary you take is a ‘directors’ salary’.
Why take both a salary and dividends?
As a director, you’ll be both an employee of your limited company, whilst technically being an employer at the same time. This means that since you’re taking a salary, you’ll need to pay National Insurance Contributions (NICs).
You are not required to pay National Insurance Contributions on dividends however, which is why we recommend taking a smaller salary so you have a steady income and making up for any differences through dividends.
How much should you pay yourself?
When deciding on your salary as a director, the main points you should consider are: 
- National Insurance Contributions
- Employees within the business
- Dividend allowance
- Personal allowance
- Tax relief on employee salaries
When considering National Insurance Contributions, you’ll also need to be aware of the different thresholds for both employee’s and employer’s NI. Please see a table below, showing you a breakdown of these different thresholds.
Employee/Employer Thresholds:
| £ per week | 2023 to 2024 | 6th July 2022 to 5th April 2023 | 6th April 2022 to the 5th of July 2022 |
| Lower Earning Limit: Employees who earn less than this don’t incur NI, but also don’t accrue benefits such as qualifying payments towards their state pension. | £123 | £123 | £123 |
| Primary Threshold: Employees begin paying NI at this point as soon as they earn above the threshold. If they don’t earn above the primary threshold, but they do earn above the lower earnings, they won’t be expected to pay NI, but they can still accrue benefits. | £242 | £242 | £190 |
| Secondary Threshold: Employees won’t pay national insurance at this point, but this is when the employer threshold comes into effect at the following rates: 2022/2023 – 15.05% (6th April 2022 to 5th November 2022) & 13.8% (6th November 2022 to 5th April 2023) 2023/2024 – 13.8% |
£175 | £175 | £175 |
| Upper Earning Limit: All employees pay a lower rate of national insurance at this point. Employer rates are the same as the secondary threshold: 2022/2023 – 15.05% (6th April 2022 to 5th November 2022) & 13.8% (6th November 2022 to 5th April 2023) 2023/2024 – 13.8% |
£967 | £967 | £967 |
Based on this table, in order to optimise your salary, we’d recommend taking above the Lower Earning Limited so that you can build your qualifying years for state pension, whilst simultaneously looking to stay below the Primary Threshold. This means you can enjoy your National Insurance benefits, whilst not having to pay it.
Since the Primary Threshold starts at £12,570, this also allows you to take advantage of your personal allowance, so you’ll only be taxed on any income after this point.
What are the benefits of having a ‘directors’ salary’?
There are a multitude of benefits to having a salary paid to you by your limited company, which we have listed below for you.
- Employee salaries can be claimed as a business expense, which can then be offset against your corporation tax.
- If you have more than 1 director under a salary, i.e. 2 directors or 1 director and 1 employee, you can benefit from the £5,000 Employment Allowance.
- You can make contributions towards your pension scheme, which is a tax-efficient way to save for retirement.
- If you choose to take a salary of £9,100 – 12,570, you won’t have to pay national insurance as an employee.
- You can still take dividends from the company to make up the difference at the end of the year, without potentially pushing yourself into the higher tax bracket.
- If a Director is paid £9,100, it presents a corporation tax saving of £1,729, whilst also utilising the Directors personal free allowance so they do not suffer personal tax.