How to Structure a Director’s Pay for Tax Efficiency in a Limited Company?

A director position is crucial in a limited company, for they are responsible for governing the company’s day-to-day operations and ensuring that their decisions are aligned with the company’s long-term objectives. It is essential to understand how to structure a director’s pay for tax efficiency in a limited company if you are running the role of a director.  

Moreover, a director receives their salary through the PAYE scheme, under which all the employees of a limited company, including directors, directly pay their income tax and National Insurance (NI) contributions from their earnings before they receive their wages.

Furthermore, being a director, you have more freedom in deciding how you want to structure your pay. By implementing the most tax-optimal ways, you can minimise your tax liabilities by withdrawing a combination of your salary and dividends, claiming allowable business expenses, making pension contributions, and reap the benefits of various tax reliefs and allowances.

Accordingly, this blog will revolve around discussing all the aspects of how to structure a director’s pay for tax efficiency and what is the optimum salary for a director in 2025.

By the end of this guide, you will have enough clarity on what ways are the most workable in terms of tax-optimisation.

Also, to know more about a director’s salary, read our guide:

How to pay yourself as a company director?

How to structure a director’s pay for tax efficiency?

To implement the tax-efficient ways, you must be able to have a firm grasp of the following highlights. It is because they all are of utmost importance to learn how to structure a director’s pay for tax efficiency.

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Understand what is director’s remuneration in a limited company?

First and foremost, to structure a director’s pay for tax efficiency, a director must know what component of a director’s pay would prove to be tax-saving. For instance, directors usually pay themselves using a combination of salary and dividends.

Now, a  salary is a fixed amount of money that a limited company pays you as compensation for your role at regular intervals, usually on a monthly basis. 

Further elaborating, since your salary is subject to income tax and National Insurance contributions (NICs), they are deducted beforehand under the PAYE tax before you are paid.

Your income tax rate in each tax year depends on which tax band your taxable income is falling within. That income must be above the personal allowance of  £12,570, which is exempt from any tax.

For the current tax year, which is from 6 April 2024 to 5 April 2025, the following income tax rates are applicable:

Tax Band	Tax  Rate (%)	Taxable Income
Personal Allowance	0	Up to £12,570
Basic Rate	20	£12,571 to £50,270
Higher Rate	40	£50,271 to £125,140
Additional Rate	45	over £125,140

You can visit the government’s official website for more details about income tax rates.

Notably, the director’s salary is classed as an allowable business expense, which means it is reclaimable and thus reduces the company corporation tax bill.

If you are keen on learning more about how to cut down the corporation tax for your company, you might find our following guide considerably informative:

How to reduce the corporation tax bill for a limited company?

Consider National insurance Contributions rates:

Similarly, for the current tax year, the Class 1 employee National Insurance rate is 8% for directors. Thus, you will pay 8% Class 1 NICs if your salary is between £12,570 and £50,270. If your earnings exceed this income range, it will be subject to a 2% NIC rate.

Lastly, your company will deduct 13.8% of Class 1 employer’s NICs from your salary under PAYE if your income is above £9,100.

Consider tax-free dividend payments:

Dividends are payments that the limited company shareholders receive from the post-corporation tax profits. It is the portion of the company’s retained profits it distributes among the shareholders.

Moreover, dividends are payments made to shareholders after a limited company has fulfilled its tax liabilities, such as corporation tax and VAT. It is worth pointing out that dividends are subject to dividend tax and are taxed differently from salaries.

For instance, dividends are subject to lower income tax rates than salary, nor are any NICs payable on dividends, both for employer and employee.

Beyond that, for the 2024/25 tax year, you receive a tax-exempt dividend allowance of £500 and it is other than your personal allowance.  Thus, you can receive up to £13,070 before paying any income tax at all.

Apart from this allowance, dividend income is taxed at the following rates depending on your total taxable income:

Tax Bands	Tax rates on dividends over the allowance (%)	Annual Income
Basic Rate	8.75	£13,070 to £50,270
Higher Rate	33.75	£50,271 to £125,140
Additional Rate	39.35	over £125,140

You can visit the government’s official website to gather more information about dividends taxes.

To take a deeper dive into dividends, read our blog:

A detailed guide to how dividends work in a limited company?

Set the optimum salary for a director in 2025:

As stated above, as long as your earnings do not exceed the personal allowance of £12,570 in the  2024/25 tax year, you are free of any income tax liability. Hence, keeping your salary below this threshold can save you from any income tax. 

However, despite being immune to income tax, you will still have to pay NICs if your earnings pass the current NIC primary threshold of £12,570). Further, you must pay employer NICs on any earnings beyond £9,100.

Therefore, it is a tax-optimal way to set your salaries between the lower earnings limit and the primary threshold to keep your state pension yet make no NICs payment.

More specifically, for the current tax year, the tax-efficient salary threshold is often equal to the  NIC Lower Earnings Limit of £6,396 or the NIC Secondary Threshold of £9,100 per year. 

Alternatively, you can take up a salary up to the NIC Primary Threshold and a personal allowance of £12,570 per year. It ensures that you pay minimal NICs while qualifying for State Pension and other benefits.

Unless you plan to receive all your personal income as a salary rather than have it as a mix of salary and dividend income, you should choose one of the above-stated options.

Pay yourself in combination of salary and dividends:

It is noteworthy that dividend tax rates are considerably lower than income tax rates because dividends are paid from retained company profits, i.e. the profits remaining after the company’s tax liabilities have been accounted for, including corporation tax and VAT. 

For greater clarity, limited companies need to pay between 19% and 25% corporation tax on all the taxable profits before distributing dividends among shareholders. Fortunately, this double taxation approach results in a lower overall tax burden than when you take up all income as salary. 

Ultimately, you can greatly lower your tax liability and make significant savings by paying yourself an optimal combination of salary and dividends. It will even be more fruitful if you lie into higher tax brackets. 

Receive pension contributions directly from your company:

Another useful method of learning how to structure a director’s pay for tax efficiency is to receive your remuneration directly from the company in the form of pension contributions.

By contributing to a personal pension scheme through the company, you can reduce corporation tax and avoid income tax or NICs.

Notably, it is opposed to contributing to your pension yourself since it is considered an employer pension contribution.

To go further, as pension contributions don’t add to your income, they do not end up increasing your income tax bill. You can claim them as an allowable business expense, which will reduce your corporation tax bill. Likewise, with pension contributions, there are no employer NICs to pay,  saving you more money.

However, as an individual, you are not allowed to contribute more to a pension than your salary for the year. Hence, if you take a small salary along with dividends, you will not be able to contribute much to your pension.

However, employer pension contributions are not limited in this way. Instead, they are limited only by the pension annual allowance, which is presently £60,000. As a result, any contributions made by you and your employer are considered.

So your company can contribute up to this amount into your pension, even if you are on a small salary.

On the contrary, the main drawback of receiving remuneration in the form of pension contributions is that you can’t access your pension until you reach the age of 55.

In brief, pension contributions cannot be replaced for salary or dividends, but rather complement both.

Claim tax-relief on business-related expenses:

Another key part of understanding how to structure a director’s pay for tax efficiency is making substantial use of expenses and benefits that the directors exclusively used for business purposes and paid for them through their personal funds. It is in addition to the salary and dividends that directors receive. 

Furthermore, a few of the allowable expenses and benefits that a director can claim directly from their limited company include:

• Pension contributions schemes.
• Retirement benefits schemes.
• Office equipment.
• Training costs.
• Professional membership fees and subscriptions.
• Company vehicles.
• Fuel, travel, and parking expenses. 
• Legal and Accountancy service fees.
• Medical insurance.
• Work-from-home expenses.

It is worth pointing out that a limited company might have to pay tax and NIC on several expenses and benefits they provide to directors.

To gain an in-depth understanding of the allowable expenses that you can claim to reduce your company’s corporation tax, read our thorough guide:

What are allowable expenses for limited companies?

Claim employment allowance:

Under the employment allowance scheme, certain limited companies can reduce their annual employer’s NIC by up to £5,000 each tax year. However, it comes with the following conditions:

• You can claim employment allowance if your company’s NIC liability was less than £100,000 in the last tax year.
• The company has at least one employee, excluding a director, who earns more than the NIC Secondary Threshold. Consequently, you cannot claim this allowance if you are running the company as the sole director and do not hire anyone else to extend services in your company.

Notably, in terms of tax optimisation, sole directors with no other employees may want to consider taking a salary that does not exceed the Primary or Secondary thresholds because, after that, NIC liability applies.

On the contrary, in a company run by multiple directors or other employees, directors can take salaries up to their annual personal allowance of £12,570. They can then claim the employment allowance to make up for the NICs that the directors and the company have to pay.

Bottom line:

In a nutshell, comprehending how to structure a director’s pay for tax efficiency is not just about reducing your tax liability but also paying the right amount so that you can retain a larger chunk of your earnings.

Similarly, if you choose Accountingfirms to find a skilled yet wallet-friendly accountant from our comparison list, they can provide you with personalised tax-efficient planning that will lead to significant savings. Consequently, you can create opportunities for putting more money back into your business ventures or personal pursuits to bolster your financial well-being.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.