Director's Salary
As a director of your Limited company, you have control of how you set up your salary, and it’s a good idea to revisit this decision each year as this helps to make it a deliberate part of your business strategy. In this article we’ll look at some of the factors that might affect your decision.
Salary or dividends?
Assuming there are no external constraints (for example, you’re not a contractor working inside IR35) you can take money out of your company as dividends, as well as paying yourself a salary. The tax treatment of dividend income is different from salary, and in general opting for a lower salary and higher dividends will be more tax efficient, but there may be reasons why this isn’t right for you and tax efficiency is only one of several factors that you’ll want to consider.
For example, if you’re applying for a VISA or a mortgage you may have to meet salary criteria, or you might prefer to pay more of your tax through PAYE, rather than saving separately for your tax bill.
Current dividend tax rates are:
Up to £500 of dividend – Nil.
Basic rate tax payer – 8.75% (2024/25)
Higher rate tax payer - 33.75% (2024/25)
Additional rate tax payer – 39.35% (2024/25)
Examples
Here are some examples of how you might set your salary, and the amount you would take home after tax:
Gross Annual Salary | Employee NI (12%) | Tax | Net Annual Salary | Monthly Net Salary |
£9,100 | £0 | £0 | £9,100 | £758 |
£12,570 | £0 | £0 | £12,570 | £1,048 |
£20,319 | £930 | £1,550 | £17,839 | £1,693 |
£30,000 | £2,092 | £3,486 | £24,422 | £2,500 |
£40,000 | £3,292 | £5,486 | £31,222 | £3,333 |
Barriers to taking dividends
The barrier to taking dividends is that your company has to have made enough profit to cover them. Paying dividends where the company has made a loss will create a director’s loan account, which may lead to an additional tax liability at 33.75%.
Planning for the year ahead
Check now if there are any issues coming up during this year that will rely on your salary. For example, as we’ve already mentioned you may have to meet a minimum salary figure for a VISA, mortgage or loan application.
Ask your accountant for a forecast
If you have an idea of the total amount of income you need for the year, and how you’d like to split that between salary and dividends, it’s a good idea to ask your accountant for a forecast for the coming year. This will give you an idea of the availability of dividends, and allow you to set aside the right amount of money to cover your tax bill when it’s due.
If you’re a client of Orange Genie Accountancy
If you’re a client of Orange Genie Accountancy and you haven’t done so yet, please complete our Payroll Questionnaire to ensure your accountant has all the info they need about your intentions for the coming year.
If you have employees
If you have employees, your payroll position could be more complex. Please book a call with your Orange Genie Accountant to discuss your particular situation in detail.
Ultimately, it’s up to you
You are the director of your Limited company any ultimately you have sole responsibility for determining the level of salary you wish to take from your Limited company. Your accountant will advise on the tax implication, but is not able to tell you which salary to take.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.