Assumption: UK resident taxpayer with a standard personal allowance
Allowances & tax rates
For 2024/25 the personal allowance remains the same at £12,570 – this means that your first £12,570 of income is tax-free.
The higher tax band has remained the same at £50,270.
For income above this, the tax rates are as below (these apply for income other than dividends as dividends are taxed differently)
| Tax Band | Tax Rate |
| £12,570 to £50,270 | 20% |
| £50,270 to £125,140 | 40% |
| £125,140 + | 45% |
Why would I want a salary through my company when I can take dividends?
There’s a tax optimal setup where the owner-manager (single director), assuming they’re not earning a salary (or other income) from elsewhere, should process a small salary each month, and then anything more than that should be processed as dividends.
There are 2 main benefits to this:
- Declaring a salary of £758 per month over a year counts as a full year of national insurance contributions, which helps you get the full state benefits, like state pensions. It is, however, just below the secondary earnings threshold, meaning that you’ll be paying both Employee and Employer NIC at zero %, so there’s actually no NIC to pay!
- When you earn less than £9,096 as a salary in the 2024/25 tax year, there are no employee and employer NICs to pay. This £9,096 equates to £758 per month. Because there are no NICs to pay, salaries below this level are the most tax-efficient way of extracting money from a company. Only after that amount do dividends become a more tax-efficient way of extracting funds than salaries.
How can my company process a salary for me?
For your company to ‘declare’ a salary, first the company needs to have a PAYE scheme. We can set this up for you.
What are the steps in setting up a PAYE scheme?
If you let us know that you want to set up a PAYE scheme, we send you a few questions that we need you to answer. Once you’ve answered these, we’ll set up the PAYE scheme with HMRC.
After that, HMRC should send a letter to the company giving two codes in a letter. You just need to take a picture of that letter and send it to us. We’ll need this by the 24th of the month at the latest, in order for us to process payroll for you in that month.
Once that’s done, your PAYE scheme is up and running. We’ll then process a salary for you each month.
What if I have other employees?
If you have other employees, the ‘optimal salary’ will be different from the £758 per month mentioned above.
The employment allowance for 2024/25 enables employers to not pay the first £5,000 of employer’s national insurance. This is an initiative from the government to encourage continued employment in the UK. The employment allowance means that it is more tax-efficient to take a gross salary all the way to the tax-free personal allowance of £12,570 for 2024/25.
What if there’s more than 1 director on payroll?
This is similar to the ‘What if I have other employees?’ question above. If there is more than just two directors to be processed through payroll, then let’s discuss to find the optimal salary.
If there are only two directors’, and no other employees, then the answer is straightforward: the optimal salary per director is £1,047.50 each month.
What’s the difference between ‘declaring’ and ‘paying’ a salary.
When we ‘declare’ a salary for you, we’re telling HMRC that the company owes you that salary. We therefore account for this through the directors’ loan.
As you may know know, every time you take money from the company, we process it through the Director’s Loan Account.
Therefore, if we were declaring a salary of £758 per month, and you were taking £1,000 per month, your Director’s Loan Account balance would be going up by £242 per month.
What if my company isn’t generating spare cash for me to take?
This actually doesn’t affect the fact that it’s still a good idea to process the salary through the company.
The reason being that as mentioned in the point above, we will just be adding the salary to your Director’s Loan Account balance.
Then, when there is sufficient cash in the company to settle the amounts that it owes to you, as director, you can take the cash out without any tax implications, because it’s already been ‘taxed’, albeit at zero %
We can help you
If you are interested in setting up a PAYE scheme or have any questions about your existing PAYE Scheme, then please get in touch with us and we will be happy to help you.
