Updated for 2025/25

We are often asked for advice on the most tax efficient way of paying yourself from your company.

The official term is ‘profit extraction’ – how to get more money out of your business and into your pocket – legally of course!

By far the most efficient way of taking money out of your limited company is to pay a combination of minimal Directors Salary plus a dividend and tax free expenses.

Basic Directors Salary

The Directors salary should be run through your payroll system to ensure you are deducting the correct amount of PAYE and National Insurance (NICs) on the salary that you are paying yourself.

Salaries attract NICs for both employer and employee. The salary and the NICs are both allowable expenses in the Corporation Tax return.

We recommend you pay yourself at the secondary threshold level. At the secondary threshold level – the Director will qualify for National Insurance credits, without actually paying any contributions – this protects your National Insurance record and protects your entitlement to certain benefits including the State Pension.

Dividends

Are paid out of profits after tax or from company reserves – i.e. retained profits after tax has been deducted carried forward from earlier periods.

Dividends however, are not subject to NICs which makes them more efficient than a salary.

From April 2024, the tax rate on dividends is:

Tax Free Expenses

What can a director pay himself by way of tax-free expenses? Examples include but are not limited to:

• Mileage (but not commuting) for any business-related travel in own car
• Use of home office, if the director works from home
• Any ‘own pocket’ expenses incurred on behalf of the business
• Pension contribution

How much to pay?

It does depend on an individual’s personal circumstances, but generally, directors will pay themselves an annual wage equal to or slightly above the secondary threshold for NICs.

• 2020/21 –  £169 per week, £732 per month or £8,788 per year
• 2021/22 – £170 per week, £737 per month or £8,840 per year
• 2022/23  – £175 per week, £758 per month, £9,100 per year
• 2023/24 –  £242 per week, £1047.50 per month, £12,570 per year
• 2024/25 –  £242 per week, £1047.50 per month, £12,570 per year

However…

…HMRC introduced the Employers Allowance which allows companies to claim back the first £5,000 of Employers NICs. This was great news for employers as this meant that whilst the company was eligible to claim the Employers Allowance – it is more tax efficient for a director to pay himself up to the full tax-free allowance.  The director will have to pay approx £478.86 in the tax year 2024/25 of employees NICs at a rate of 13.8%, these are fully tax deductible so will reduce your corporation tax bill.

But wait…

…HMRC decided to restrict the Employers Allowance to companies that employed more than one member of staff – small companies that have one director/employee are no longer eligible to claim the Employer Allowance which means that most single director/employee companies went back to paying the director an annual wage equal to or slightly above the primary threshold for NICs.  The director will have to pay approx £478.86 in the tax year 2024/25 of employees NICs at a rate of 13.8%, these are fully tax deductible so will reduce your corporation tax bill. 

Common errors:

• Director doesn’t pay himself at all (it happens!) and doesn’t get the benefit of his tax-free allowance.
• Director pays himself a market wage generating a large tax and national insurance bill that must be paid to HMRC and pays large tax or NIC contributions unnecessarily.
• Director pays himself a weekly or monthly ‘salary’ but doesn’t actually run it through payroll. If you don’t operate a payroll system then these payments are really directors loan payments that will have to be offset against a dividend later.