How to pay yourself from your business

In this article, we outline how directors of their own company might pay themselves and what you need to consider when deciding how and what your director’s pay is.

Director’s Salary

By receiving a director's salary of more than £533 per month, you maintain your National Insurance records giving you access to certain state benefits such as the state pension. Furthermore, the salary is a tax-deductible expense for your company and, assuming your company is your main source of income, your monthly salary payment should not be subject to tax or National Insurance (up to a maximum of £758 per month for 2024/25). 

If you do opt to pay yourself a director's salary above £533 per month, your company will need to be registered as an employer and run a payroll which complies with Real-Time Information (RTI) rule. 

To discover more on the advantages and disadvantages of a directors' salary, read our comprehensive Guide to Directors' Pay. 

Sole-director limited companies are not eligible for Employment Allowance, but paying yourself a salary may still have many advantages.

What is a dividend?

Your Board of Directors can decide if dividends should be paid to shareholders and how much those dividend payments are. Dividends must be paid out of profits and will be paid to shareholders in accordance with the level of their shareholding. They are not tax-deductible expenses and there must be paperwork to document dividends, such as a minutes of a meeting and dividend vouchers.

The tax on dividends

For 2024/25, the first £500 of dividends is covered by the dividend allowance and is tax-free. Dividends more than the dividend allowance are subject to the following rates:

• Basic rate – 8.75%
• Higher rate – 33.75%
• Additional rate – 39.35%

Example

For this example, we will assume that you have no other income, because any other source of income (such as rental income, interest etc.) would impact on your tax position. 

Your annual salary is £9,100, made up of 12 monthly payments of £758.33. By taking this from your company, you can then pay £500 plus the remainder of your personal allowance as dividends without any tax i.e. £500 + (£12,570 personal allowance less the salary of £9,100) = £3,970. This means a total of £13,070 will be tax free (dividend allowance plus the personal allowance). 

Once the above has been taken into consideration, and you have claimed your personal and dividend allowances, the next £37,200 of dividends will be subject to tax at a rate of 8.75%. 

If dividend income exceeds £37,700 (£500 + £37,200), it will attract tax at a minimum rate of 33.75%. Should your total income exceed £100,000, you should review the tax allowances and reliefs available to you, otherwise you may start to lose your personal allowance. 

 

Scottish taxpayers

Although Scottish taxpayers have their own tax bands and rates, they only apply to earned income. The personal allowance and the bands and rates applied to dividend income are set by Westminster. Unless you’re intending to have a salary greater than the personal allowance, your income is unlikely to be subject to the Scottish bands and rates.

This assumes all your income comes from the company and consists of mostly salary and dividends.

Other ways to pay yourself

When determining your director's salary, bonus and dividends, consider external factors. We recommend you seek advice from an accountant to help you choose the best payment options for both you and your company. 

Some other options available to take money out of the company include:  

• Consider transferring shares to spouses
• Make a claim from the company for ‘use of home as office’
• Make pension contributions from the company
• Charge the company interest on any directors loans you’ve given to it

But with all these options, there are considerations and criteria to take into account, as well as paperwork to get in place. We would not recommend doing any of these without taking advice. 

Payments on account

A payment on account is an instalment you pay towards the tax due in the following year. You will be expected to make a payment on account if your tax bill exceeds £1,000 and less than 80% of your tax liability is collected by Pay As You Earn (PAYE).

If you receive dividends that exceed your personal allowance and dividend allowance, it is highly likely that you will have a tax bill to pay. And if you receive taxable dividends above £11.928, they will attract a tax rate of 8.75% and subsequently you are likely to have a tax bill more than £1,000. 

If your tax bill is more than £1,000, you will have to pay this tax bill and a payment on account- which is half your bill again. This can be a significant and an unexpected cost. 

How to avoid payments on account

Payments on account are due for payment in January and July. To reduce the impact on your cashflow, you could decide to have some of your tax collected through your tax code. If you opt to have tax collected through your tax code, you will find larger deductions of tax are made from your monthly salary from the company and you have less net pay. But come January and July, you should have much smaller payments to make. 

Just like we pay our utility bills monthly by Direct Debit, some people prefer to ‘pay as you go’ and avoid any big expenses, so they will prefer the tax code option. 

Other people prefer to keep their cash in their bank account for as long as possible and so they would prefer the payments on account route. 

Last updated: 27th August 2024