For company directors, deciding how to take income from the business isn’t as simple as setting a salary. 

With options like dividends, pension contributions and director’s loans, you have many opportunities to make your income work for your situation. 

However, with choices come tax considerations. Get it right, and you could save thousands; get it wrong, and unexpected tax bills or HMRC issues could follow.

This guide lays out everything you need to know about paying yourself as a director. We’ll cover everything from timing your payments for tax efficiency to understanding the benefits beyond basic pay. 

By the end, you’ll have a clear roadmap for maximising your income while staying fully compliant.

Understanding your position as a director

When you set up a limited company, you create something that’s completely separate from you – even if you’re the only person involved. 

This isn’t just a legal technicality – it affects everything about how you can take money from your business.

Think of it this way: your company’s bank account isn’t like your personal account, where you can withdraw money whenever you want. 

Every penny moving from the company to you must be properly labelled and recorded. 

This might sound like a hassle, but it actually protects you. If your business ever runs into problems, your personal assets (such as your house) are usually safe.

How being a director affects your income

Running your own company puts you in an unusual position. You’re both the boss and an employee at the same time. 

While this gives you more control over your pay than a regular employee would have, it also means you need to follow some special rules.

Here are the basics of what makes paying yourself as a director different.

• You decide when and how to pay yourself.
• You need to think about what’s best for the company, not just your own pocket.
• Special tax rules apply to directors
• You have extra responsibilities to HMRC and Companies House.

Primarily, you can’t just transfer money to your personal account whenever you need. 

Instead, you need to use proper channels. The main ways to take money from your company are through salary, dividends, expense repayments or formal loans. Each of these comes with its own rules and tax implications, which we’ll explain shortly. 

The different ways to pay yourself

As a director, you have several methods for paying yourself, each with its own tax treatment and rules. Let’s review the three main options. 

Taking a salary

As a director, structuring your salary with awareness of key thresholds can help you manage both your tax and national insurance (NI) obligations. 

Here are the primary thresholds for the current tax year and what each one means.

Lower earnings limit

The lower earnings limit is £6,396 per year (£533 per month). If you earn below this amount, you won’t make any NI contributions and won’t receive NI credits. 

These credits are valuable as they count towards your state pension entitlement. By setting your salary above this limit, you gain these pension-building credits without having to make NI payments.

Secondary threshold

After the 2024 Autumn Budget, the secondary threshold is set at £5,000 per year. For salaries above this, the company pays 15% in employer NI.

Many directors choose this threshold as a salary level because it enables them to earn NI credits for their state pension while avoiding personal NI payments.

Primary threshold

The primary threshold is £12,570 per year (£1,047.50 per month), which also matches the personal allowance for income tax. 

At this level, you’ll start paying employee’s NI at a rate of 8% on earnings above the threshold, so setting your salary here keeps you within the personal allowance for income tax purposes, ensuring that your earnings remain tax free. 

Directors who choose this level of pay often do so to maximise their pension and tax benefits, while keeping contributions manageable.

How NI is calculated for directors

Directors’ NI is calculated differently from standard employees due to their annual earnings period. Unlike regular employees, who have NI calculated on each pay period (for example, monthly), directors typically use an annual earnings method. 

This approach accumulates their earnings over the tax year and contributions only become due once the annual thresholds are met, giving more control over NI timing throughout the year.

For example, directors using this standard cumulative method might pay no NI in the early months if they haven’t reached the primary threshold (£12,570 for employee NI in 2024/25). Once they surpass this, contributions are calculated retroactively based on their cumulative income. 

Alternatively, directors who prefer steadier deductions throughout the year can use the alternative method, where monthly NI thresholds apply (similar to regular employees). 

This method smooths out contributions, but a final reconciliation at the tax year-end ensures the total aligns with the annual thresholds, covering any balance owed.

Understanding dividend payments

Dividends work completely differently from salaries. They’re payments from your company’s post-tax profits and they’re often more tax-efficient than salary once you’re above certain thresholds.

The dividend allowance for 2024/25 is £500. After you hit that, you’ll pay tax at the following rates.

Basic rate taxpayers

• 8.75% on dividends up to £50,270
• Much lower than basic rate income tax at 20%

Higher rate taxpayers

• 33.75% on dividends between £50,270 and £125,140
• Still lower than higher-rate income tax at 40%

Additional-rate taxpayers

• 39.35% on dividends above £125,140
• Compare this to 45% income tax

There are a few compliance requirements attached to dividends. Notably, you can only pay them when:

• your company has sufficient profits
• you’ve properly declared them
• you’ve created dividend vouchers
• all shareholders receive their due proportion.

Beyond salary and dividends

While most directors rely on a combination of salary and dividends, there are other ways to extract funds from your company that can support your income strategy while sometimes offering tax efficiencies. 

Here’s a closer look at some additional options.

Expense repayments

Directors often incur business-related expenses on behalf of the company, and reclaiming these is a common and tax-efficient way to manage company expenses. 

Although not a form of income, proper expense repayments can reduce your out-of-pocket costs and should be handled carefully to stay compliant.

• What qualifies: Only genuine business expenses are eligible for repayment. This can include costs directly related to company operations, such as travel, phone bills, office supplies and professional fees.
• Documentation requirements: Each claim must be backed by proper evidence – such as receipts, invoices or mileage logs – and recorded accurately in company records. HMRC requires detailed records to prove that expenses are wholly, exclusively and necessarily for business purposes.
• Tax efficiency: Since these are reimbursements rather than income, they won’t be subject to income tax or national insurance contributions (NI), making them a simple way to recoup business-related expenses without increasing your tax bill.

Director’s loans

A director’s loan is essentially a temporary loan taken from the company, allowing you to access company funds without drawing an official salary or dividend. 

However, it’s essential to understand the tax rules surrounding director’s loans to avoid unexpected liabilities.

• What it involves: A director’s loan allows you to borrow funds from the company. The loan should be documented in the company’s records, including the amount borrowed, the repayment schedule and any interest if applicable.
• Repayment terms: To avoid additional tax charges, the loan should be repaid within nine months of the end of the company’s accounting period. Failure to do so may lead to a Section 455 tax charge, where the company could face an additional 33.75% tax on the outstanding loan amount until it’s repaid.
• Loans over £10,000: If the loan exceeds £10,000 at any point, it may be classed as a benefit in kind, and both you and the company could face additional tax and NI charges on this “benefit”. For loans above this limit, you’ll need to pay interest at HMRC’s official rate to avoid further tax implications.
• Tax planning tip: Director’s loans can be useful if you need short-term cashflow but don’t want to draw dividends or salary. Just ensure you have a clear repayment plan to avoid unintended tax consequences.

Benefits in kind

Benefits in kind (BIK) are non-cash perks that your company provides, like a company car or private health insurance. While these benefits can offer value, they come with specific tax treatments and need to be properly documented.

• Types of benefits: Common BIK options for directors include company cars, health insurance, life insurance and childcare support. Each type of benefit has its own tax rules and potential advantages depending on your personal circumstances.
• Reporting requirements: Any benefit in kind must be reported to HMRC on a P11D form, and the company is required to pay Class 1A national insurance contributions on the value of these benefits. You’ll also pay tax on the value of the benefit, which is added to your annual income and taxed at your marginal rate.
• Tax efficiency: Some benefits in kind, particularly electric company cars or childcare vouchers, can be tax-efficient choices. For instance, electric vehicles currently benefit from lower benefit-in-kind tax rates, making them a popular choice for directors seeking a company car.

Understanding and properly managing these additional methods of extracting income can enhance your overall income strategy as a director. 

Whether you’re looking to recover business expenses, cover short-term cash flow needs or enjoy additional perks, these options can be highly valuable when handled within HMRC’s guidelines.

Always contact professional accountants or tax advisers if you’re unsure of how to comply with the rules, as they tend to be strict and the price of mistakes is high. 

Understanding employment allowance

Employment allowance is a government scheme that provides eligible companies with up to £10,500 off their annual employer NI liability.

In simple terms, it means your company could save up to £10,500 on the national insurance costs of paying staff wages – including your director’s salary.

Think of it as a rebate from the government, designed to help smaller businesses with their employment costs. 

This sounds straightforward, but it can change how you structure your director’s pay.

Why does it matter so much?

To understand why employment allowance is so impactful for directors, we need to look at how employer’s national insurance normally works. 

As explained earlier, when you pay yourself a salary above £5,000, your company usually has to pay 15% extra in employer’s NI on everything above that amount. This extra cost often puts directors off taking a higher salary.

With the employment allowance, this cost is covered by the £10,500 allowance, allowing the company to save on employer NI.

Who can actually claim it?

If a company has more than one person on payroll (like a director plus at least one employee), it may qualify for Employment Allowance, as long as the other employee earns above the secondary NI threshold (currently £5,000).

A sole-director company with no other employees generally cannot claim Employment Allowance, even if that director earns above £5,000.

Many family businesses use it with spouses both acting as directors. 

How employment allowance changes your decisions

This difference between qualifying for employment allowance or not usually determines your salary level. Here’s why.

Without employment allowance, taking a salary above £5,000 means your company pays that extra 15% in employer’s NI. You could take £12,570 to use up your personal allowance, but your company would pay employer’s NI for the privilege. 

That’s why most directors without employment allowance stick to £5,000 – it avoids this extra cost while still providing a decent salary.

But with employment allowance, you can comfortably take that higher £12,570 salary because the allowance wipes out the employer’s NI. 

In the next section, we’ll look at combining these salary decisions with dividend payments to create the most tax-efficient payment strategy.

Choosing your most tax-efficient salary

This is where everything comes together – how to blend salary and dividends for the best tax outcome. 

Most directors end up using a mix of both, but getting the balance right makes a huge difference to how much money you keep.

Let’s examine your main options and, crucially, how to combine them with dividends for the best overall result.

Option 1: Low salary plus dividends (£6,396)

If you’re aiming to keep personal and company costs to a minimum, setting a low salary of £6,396 per year (or £533 per month) could be a straightforward choice. 

This allows you to maintain state pension entitlement with minimal outgoings, as it keeps you under key national insurance (NI) thresholds.

This salary level has the following advantages.

• No national insurance: You and your company avoid NI contributions entirely. This makes it a cost-effective approach since there’s no additional NI to pay on top of your salary – what you see is what you get.
• Qualifying years for state pension: Despite not paying NI, you’ll still build qualifying years towards your state pension. This salary level is above the lower earnings limit, so you benefit from pension credits without any out-of-pocket NI costs.
• Unused personal allowance: Since this salary is well below the £12,570 personal allowance, you’re leaving £6,174 of tax-free allowance unused, which could otherwise be applied to offset taxable income.

In this setup, dividends become your primary source of income. After paying corporation tax, dividends are taxed at a basic rate of 8.75%, making them a highly tax-efficient way to supplement your income – especially for profitable companies. 

This structure is best for businesses with steady profits that can sustain regular dividend payments. 

However, it does rely heavily on company profitability, as dividends can only be issued from available profits.

Option 2: Optimal solo salary plus dividends (£5,000)

For directors who don’t qualify for the employment allowance, setting a salary at £5,000 per year (or £758 per month) is often considered the “sweet spot”.

This salary level keeps both employer and employee NI contributions at bay while making better use of your personal allowance than the lower £6,396 salary.

This salary level offers the following advantages.

• No employer’s NI: At £5,000, your salary remains below the point where employer NI contributions of 15% would apply.
• No employee NI: This salary level is below the primary threshold for employee NI contributions, so you also avoid employee NI.
• Maximising your tax-free allowance: You’re using more of your £12,570 personal allowance, reducing the amount of income subject to higher tax rates and leaving less allowance “unused” compared to a lower salary.

With this approach, dividends can still supplement your income, but you’ll need less from dividends to reach your target income, creating less pressure on company profits. 

Dividends above this salary are still taxed at 8.75% (basic rate), but since more of your income now comes from a tax-free salary, your overall tax liability can be lower than with Option 1. 

This option is well-suited for directors who seek a balance between stable, tax-efficient income and flexibility.

Option 3: Maximum tax-efficient salary plus dividends (£12,570)

If your company qualifies for the employment allowance (EA), then taking the full personal allowance as salary – £12,570 per year (or £1,047.50 per month) – is often the most tax-efficient approach. 

The employment allowance offsets your company’s employer NI, allowing you to take a higher salary without additional cost.

At this salary level there are the following advantages.

• No income tax: By using your full personal allowance, your salary remains within the tax-free threshold, so you won’t pay any income tax on this portion.
• Employer’s NI covered by employment allowance: The increased Employment Allowance of £10,500 can offset the employer NI that would apply to a £12,570 salary, maximising tax efficiency for eligible companies.
• Highest possible tax-free salary: This level allows you to maximise the tax-free income you draw from the company, reducing the amount you need to rely on dividends.
• Corporation tax efficiency: Since salary is a deductible business expense, taking a higher salary means your company can reduce its taxable profits, ultimately lowering the corporation tax bill.

With more of your income coming from tax free salary, dividends become a secondary income source, but they’re still available if needed and will be taxed at 8.75% (basic rate). 

This approach provides a strong balance of guaranteed, tax-free income through salary while also enabling flexible dividend payments when the company’s profits allow.

Making your strategy work long term

Getting your basic salary structure right is essential, but the timing of payments and regular reviews can greatly impact your overall tax efficiency throughout the year.

Timing your payments

While salaries are generally paid monthly, dividends offer more flexibility. Many directors strategically time their dividend payments – often taking them in larger chunks two or three times a year. 

This offers several advantages.

• Cashflow management: Align dividend payments with your company’s most profitable periods, helping to maintain smoother cashflow.
• Tax planning: Spreading dividend payments across different tax years can keep you within lower tax bands, reducing your personal tax bill. For example, if your total income is projected to exceed £50,270 for the current tax year, deferring some dividends to the next tax year can help keep more of your income in the basic tax band.
• Improved visibility: Larger, less frequent payments make it easier to monitor your financial position, offering better control over income.
• Corporation tax considerations: Timing dividends in line with your company’s tax schedule can help ensure funds are available for corporation tax payments, allowing you to plan your cashflow more effectively.

It’s important to ensure that all dividends are properly declared and documented whenever they are issued. Opting for fewer, larger payments simplifies this process.

Reviewing and adjusting your strategy

Regularly reviewing your payment strategy is vital, especially as market conditions, tax rules and your personal circumstances can change. Key times to review include the following.

• Before the end of your company’s financial year: This allows you to adjust payments and maximise tax benefits based on annual performance.
• At the start of each tax year: Review new allowances and thresholds to update your strategy.
• Following changes in tax rules: Quickly adapt to new rates or allowances to maintain efficiency.
• During changes in company profitability: Adjust your salary and dividend mix to keep your payment strategy in line with your business goals.

Planning for success with HW Associates

Choosing the right payment strategy as a director isn’t a one-time decision. Tax rules change, company performance varies and personal circumstances evolve. 

Professional support is invaluable to maximising your salary and ensuring compliance. 

At HW Associates, we help directors like you to:

• structure their pay for maximum tax efficiency
• time their salary and dividend payments effectively
• stay compliant with all tax requirements
• adapt to changing circumstances and rules
• keep proper records and documentation.

We understand that every director’s situation is unique. Whether you’re running a solo business or managing a growing company, we’ll help you find the most tax-efficient way to pay yourself while keeping things straightforward and compliant.

Want to make sure you’re taking money from your company in the most tax-efficient way? Get in touch with our team today. 

We’ll review your current setup, explain your options and help you implement the best strategy for your situation.