Optimum director salary levels for owner-managed businesses

If you’re a director/shareholder of a company, you probably take money out of the business through a mix of salary, bonuses and dividends. When deciding what combination to use, you should consider several factors, including tax efficiency.

Extracting profits from your company: issues to consider

When deciding how to take money out of your company there are several tax and non-tax issues to consider. The issues include (but are not limited to):

• Ensuring the company has sufficient distributable reserves for paying dividends, both now and in the future,
• Deciding whether you want to pay out all the company’s profits or just enough to pay your living costs,
• Knowing how and when tax and National Insurance contributions (NICs) will be payable and whether by you or the company,
• Giving yourself enough qualifying years to receive the highest possible state pension,
• Understanding how this income may impact your tax position if you have additional income sources, not connected with your role/company,
• Considering whether the type of remuneration affects any mortgages or insurances you have or plan to get,
• Understanding the interaction with the high-income child benefit charge, and
• Ensuring the type of remuneration doesn’t negatively affect your personal pension planning.

Tax efficiency

The optimum director’s salary depends on the tax and NIC rates and thresholds for the tax year, as well as your individual circumstances and those of the company. Generally, the most tax efficient strategy is to take a low salary to fully use your personal allowance and not breach the threshold for paying employee NICs, and to take the balance of distributable profits as dividends.

Another issue that may affect the optimum director’s salary is the Employment Allowance. This allowance enables eligible employers to reduce their annual National Insurance bill. Notably the Employment Allowance cannot be claimed by a company with only one director where that director is the only employee liable for employer Class 1 NICs. In 2024-25 the maximum Employment Allowance is £5,000 and in 2025-26 the maximum is £10,500.

Example

For 2024-25, if you’re a director of a company that qualifies for the Employment Allowance and have no other income your optimum salary will probably be £12,570. This amount ensures you fully use your tax-free personal allowance, won’t have income tax to pay on your salary and keeps you below the threshold for paying employee Class 1 NICs, while providing you with a qualifying year for state pension purposes. The company may be liable to Employer Class 1 NICs payable on the salary above £9,100, to the extent this is not covered by the Employment Allowance.

If you’re the sole director of a company that does not qualify for the Employment Allowance,

Employer Class 1 NICs will be payable on the salary above £9,100.

The company will get corporation tax relief on both the salary and any employer NICs paid.

Action

Before the end of the tax year on 5 April 2025, it’s crucial to review and determine your optimum director’s salary for 2024-25. Ahead of the new tax year, you should also check the most tax-efficient amount for you and your business for 2025-26.

How we can help

Our tax experts can provide personalised advice on how to extract profit from your business tax efficiently. If you would like to see how Saffery can help you, please speak to your usual Saffery contact or get in touch with Shirley McIntosh.