As a director of your own limited company, one of the most important financial decisions you’ll face is how much salary to pay yourself. This decision isn’t just about putting money in your pocket; it has significant implications for your tax, your company’s tax position, and your overall financial strategy.

The National Insurance Threshold

A common starting point for many directors is to set their salary at the National Insurance (NI) threshold. For the 2024/25 tax year, this is £12,570 per year or £1,048 per month. Why is this level significant?

1. It’s tax-efficient: At this level, you don’t pay any income tax or National Insurance contributions.
2. It preserves your state pension entitlement: Earning at this level counts as a qualifying year for your state pension.
3. It’s a tax-deductible expense for your company: The salary reduces your company’s corporation tax bill.

Going Beyond the NI Threshold

While the NI threshold is a popular choice, there might be better options for some. Some directors choose to pay themselves a higher salary. Here’s why you might consider this:

• Higher pension contributions: If you want to make larger pension contributions, a higher salary can be beneficial.
• Mortgage applications: Some lenders prefer to see a higher salary when you’re applying for a mortgage.
• Utilising your personal allowance: If you have no other income, you might choose to pay yourself up to the personal allowance (£12,570 for 2024/25) to make use of your tax-free allowance.

The Salary vs Dividends Balance

Many directors opt for a strategy that combines a modest salary with dividend payments. Dividends are often more tax-efficient than salary because they’re not subject to National Insurance contributions. However, dividends can only be paid from company profits after corporation tax has been deducted. A typical strategy might involve:

• Taking a salary up to the NI threshold
• Paying additional income as dividends

This approach often results in a lower overall tax bill compared to taking all income as salary.

Considerations for Higher Earners

If your company is very profitable, consider paying yourself a higher salary. While this will incur more income tax and NI, it can have some advantages:

• It can justify higher pension contributions.
• It might be beneficial if you’re planning to apply for a mortgage or other credit.
• It can be simpler from an accounting perspective than a more complex salary/dividend split.

Other Factors to Consider

When deciding on your salary, also think about:

• IR35 status: If IR35 rules catch you, you may need to take a higher salary to reflect this.
• Company cash flow: Ensure your chosen salary doesn’t put undue strain on your company’s finances.
• Future plans: Consider how your salary might affect things like entrepreneurs’ relief if you plan to sell your business in the future.

When setting your salary as a limited company director, seek advice from an accountant. There’s no one-size-fits-all answer to how much salary you should take; it depends on your personal circumstances, your company’s financial position, and your long-term goals. Consider tax efficiency, National Insurance contributions, and pension planning, and ask our professional tax accountants about a salary strategy that works for both you and your company.