Tax-Efficient Director Salaries and Dividends: Year-End Planning Guide
Chrissy Leach • 17 February 2025
As the tax year draws to a close on 5 April, company directors should review their salary and dividend strategy to ensure they are operating in the most tax-efficient way. A combination of salary and dividends can help minimise personal tax while making the most of available allowances. Here’s what you need to know to optimise your income before the tax year ends.
Understanding the Salary and Dividend Strategy
As a company director, you can choose how to pay yourself: via a salary, dividends, or a mix of both. Each method has different tax implications, so structuring your income efficiently can lead to significant savings.
- Salary – subject to Income Tax and National Insurance but allows you to qualify for state benefits and pension contributions.
- Dividends – paid from company profits after Corporation Tax, taxed at lower rates than salary but do not count towards National Insurance contributions or earnings for pension contributions.
Setting a Tax-Efficient Director’s Salary
There are various thresholds to consider when looking at the salary level:
- At the National Insurance (NI) Lower Earnings Limit (£6,396 for 2024/25) – no NI contributions due, but qualifies for state benefits (including state pension).
- Below the NI Secondary Threshold (£9,100 for 2024/25) – employers NI becomes payable if salary exceeds this amount.
- Below the NI Primary Threshold (£12,570 for 2024/25) – no personal tax or employees NI to pay, but employers NI would be payable.
- Below the tax Higher Rate Threshold (£50,270 for 2024/25 as long as total income doesn’t exceed £100,000) – basic rate tax only (20%) but employees and employers NI would be payable.
For many directors, the optimal salary level is £12,570 (within the personal allowance), while ensuring employer NI contributions are considered.
If you have children you may also wish to consider the tax-free childcare rules which are based on your income level.
Taking Dividends Tax-Efficiently
After taking a salary, dividends can be used to extract additional income from the business in a tax-efficient way. Key points to consider:
- Tax-Free Dividend Allowance – the first £500 of dividends (2024/25) is tax-free.
- Dividend Tax Rates - basic rate: 8.75% (for income up to £50,270), higher rate: 33.75% (for income between £50,270 - £125,140), additional rate: 39.35% (for income above £125,140)
- Ensure Sufficient Retained Profits – dividends must be paid from post-tax profits, so check company finances before issuing dividends.
Year-End Planning Considerations
With the tax year ending soon, consider these steps:
- Use Your Tax-Free Allowances – ensure you use the full personal allowance (£12,570) and dividend allowance (£500) where possible before they reset; they can’t be carried over.
- Balance Salary & Dividends – ensure you extract income in the most tax-efficient way, keeping personal and business taxes low.
- Consider Pension Contributions – employer pension contributions are a tax-efficient way to extract profits from the business. Next week’s blog will be about pension contributions so watch this space.
Plan Ahead for 2025/26
We’ll be posting an updated blog next month looking at planning for the 2025/26 tax year. The employers NI threshold is changing from 6 April 2025.
Take Action Before 5 April!
Now is the time to review your strategy to ensure you maximise tax efficiency before the end of the tax year. If you need tailored advice on the best approach for your business, book a call with us today.
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