How to Pay Yourself as a Director
A guide to how directors of UK limited companies pay themselves, covering salary vs dividends, tax efficiency, PAYE obligations and how to record director remuneration in the accounts.
As a director of a UK private limited company , you are both an officer of the company and (if you draw a salary) an employee for payroll purposes. How you pay yourself affects your personal tax, the company’s corporation tax bill and your entitlements to state benefits.
Methods of Payment
Directors typically use a combination of salary and dividends to extract profits from the company:
| Method | Tax Treatment | NIC Liability |
|---|---|---|
| Salary | Taxable as employment income via PAYE | Employee and employer NICs apply |
| Dividends | Taxed at dividend rates after £1,000 allowance | No NICs |
| Pension contributions | Tax-free for the director; corporation tax deductible for the company | No NICs on employer contributions |
| Benefits in kind | Taxed via P11D or payrolled | Class 1A employer NICs |
Setting a Tax-Efficient Salary
Many owner-directors set their salary at a level that maximises tax efficiency. Common salary strategies for 2024/25:
Strategy 1: NIC Primary Threshold (£12,570)
| Component | Amount |
|---|---|
| Director salary | £12,570 per year |
| Income tax | £0 (covered by Personal Allowance) |
| Employee NIC | £0 (at or below Primary Threshold) |
| Employer NIC | £479.78 (13.8% on £12,570 − £9,100) |
| Corporation tax saving | (£12,570 + £479.78) × 25% = £3,262.45 |
This is the most common approach. The salary uses the full Personal Allowance, no employee NIC is payable, and the salary plus employer NIC is deductible against corporation tax .
Strategy 2: NIC Secondary Threshold (£9,100)
| Component | Amount |
|---|---|
| Director salary | £9,100 per year |
| Income tax | £0 |
| Employee NIC | £0 |
| Employer NIC | £0 |
| Corporation tax saving | £9,100 × 25% = £2,275 |
This avoids all NICs entirely. However, the director must ensure their earnings are above the Lower Earnings Limit (£6,396) to qualify for a State Pension year.
Strategy 3: Above the Personal Allowance
Paying a salary above £12,570 triggers income tax and employee NIC, which is rarely tax-efficient when dividends are available at lower rates. However, a higher salary may be worthwhile if the director needs to:
- Build up pension contributions based on earnings
- Demonstrate income for a mortgage application
- Qualify for higher statutory pay entitlements
Paying Dividends
After salary, the most tax-efficient way for owner-directors to extract company profits is through dividends.
Dividend Tax Rates (2024/25)
| Tax Band | Dividend Rate |
|---|---|
| Dividend allowance | £1,000 tax-free |
| Basic rate (up to £50,270 total income) | 8.75% |
| Higher rate (£50,271 to £125,140) | 33.75% |
| Additional rate (over £125,140) | 39.35% |
Dividend Requirements
Dividends can only be paid from distributable profits (accumulated realised profits minus accumulated realised losses). The company must:
- Have sufficient retained earnings in the accounts
- Prepare interim accounts or rely on the latest filed accounts to confirm distributable reserves
- Declare the dividend by board resolution (interim dividend) or shareholder resolution (final dividend)
- Record the dividend in the minutes
Paying dividends that exceed distributable profits is illegal and the director may be personally liable to repay them.
Combined Salary and Dividend Example
A director of a company with £80,000 of profit, taking a salary of £12,570 and dividends:
| Component | Amount | Tax/NIC |
|---|---|---|
| Salary | £12,570 | £0 income tax, £0 employee NIC |
| Employer NIC on salary | £479.78 | Corporation tax deductible |
| Corporation tax | (£80,000 − £12,570 − £479.78) × 25% = £16,737.56 | |
| Profit after tax | £50,212.66 | |
| Dividends paid | £50,212.66 | |
| Dividend tax | £1,000 at 0% + £36,700 at 8.75% + £12,512.66 at 33.75% = £7,434.52 | |
| Total take-home | £12,570 + £50,212.66 − £7,434.52 = £55,348.14 |
Director PAYE Obligations
Even if the salary is low, the company must run PAYE payroll for director salaries:
- Register as an employer with HMRC (if not already registered)
- Submit Full Payment Submissions through RTI each time the director is paid
- Calculate and deduct income tax and NICs using the annual earnings period method (directors use a cumulative annual calculation rather than weekly/monthly)
- Issue a P60 at year-end
- Provide payslips
Director NIC Calculation
Directors’ NICs are calculated on an annual basis (the annual earnings period), not a monthly basis like other employees. This means:
- NICs are recalculated cumulatively at each pay date
- The annual NIC thresholds apply to the year as a whole
- A director paid irregularly (e.g. a lump sum once a year) pays the same NIC as if paid monthly
Pension Contributions for Directors
Making employer pension contributions is highly tax-efficient for directors:
- No income tax or NIC on employer pension contributions
- Corporation tax deductible for the company
- Subject to the annual allowance (£60,000 for 2024/25)
A director earning £12,570 in salary could also receive up to £60,000 in employer pension contributions (subject to available company profits), effectively extracting up to £72,570 from the company with minimal tax.
Director Loans
Directors sometimes take loans from the company. Key rules:
| Amount | Tax Treatment |
|---|---|
| Up to £10,000 | Tax-free if repaid within 9 months of the company’s year-end |
| Over £10,000 | Treated as a benefit in kind ; taxable on the director |
| Overdrawn director’s loan account | Company pays 33.75% s.455 tax to HMRC (refundable when repaid) |
Persistent director borrowing can be reclassified by HMRC as disguised remuneration, triggering income tax and NICs.
Accounting for Director Pay
Director remuneration creates entries in the company’s accounting records :
| Transaction | Debit | Credit |
|---|---|---|
| Salary | Directors’ remuneration expense | Net pay + PAYE liability |
| Employer NIC | Employer NIC expense | PAYE liability |
| Dividend | Retained earnings | Cash / director’s current account |
| Pension contribution | Pension expense | Pension provider payable |
Director remuneration must be disclosed separately in the company’s annual accounts filed at Companies House .
State Pension and Benefits
The salary level affects the director’s State Pension entitlement:
| Earnings Level | State Pension Impact |
|---|---|
| Below £6,396 (Lower Earnings Limit) | No qualifying year — gaps may reduce State Pension |
| £6,396 to £12,570 | Qualifies for a State Pension year; no NIC payable |
| Above £12,570 (Primary Threshold) | Full qualifying year; employee NIC payable |
A salary of at least £6,396 ensures the director builds up State Pension entitlement without actually paying any NIC.