If you are a company director, it is important to be aware of Income Tax and National Insurance rates and thresholds, dividend tax requirements, and the way in which you can pay yourself through a limited company.
Ideally, you should consult an accountant for the best professional advice and tax-saving strategies, but we’ll provide a brief overview of tax rates and allowances to get you started.
The tax rates and allowances stated in this article apply to the 2023/24 tax year, which runs from 6th April 2023 to 5th April 2024.
What tax does a company director pay?
Directors of limited companies are usually also shareholders. In fact, many small startup companies are one-person operations, whereby the only person who owns, manages, and works for the company is the single director-shareholder-employee. Whatever the setup, the following tax rates and allowances may apply:
Income Tax
As a company director, you are normally classed as an employee for tax purposes, so you will have to register your company as an employer and operate Pay As You Earn (PAYE) as part of your payroll. You will be required to pay Income Tax and Class 1 National Insurance contributions (NIC) through PAYE on the wages you receive from the company.
No Income Tax will be due on the first £12,570, which is your tax-free Personal Allowance for the 2023/24 tax year. Above that amount, you will start paying tax on your earnings.
Employee’s National Insurance
You will have to pay 12% Class 1 employee National Insurance on wages between the primary threshold (£12,570) and the upper earnings limit (£50,270/year). Above the upper earnings limit, you will pay 2% NIC. These deductions will be calculated and taken directly from your wages through PAYE.
Employer’s National Insurance
The company will also have to pay 13.8% Class 1 employers’ National Insurance on your earnings (and the wages of any other employees) above the secondary threshold (£9,100/year).
However, you may be eligible to claim up to £5,000 Employment Allowance on your employers’ National Insurance contributions if your company has more than one director and/or employee.
Dividend Tax
Dividends are paid from profits after the deduction of Corporation Tax. This means that companies pay tax on this income before it is distributed to shareholders. The rules on dividend tax changed on 6th April 2016. Previously, there was no personal tax liability on dividend income for basic-rate taxpayers.
As a result of these new rules, it’s not quite as tax-efficient to take a low salary and higher dividend payments through a limited company as it once was, though it is a far simpler system. The notional 10% dividend tax credit (which most people struggled to understand anyway) was abolished and replaced with a tax-free dividend allowance, which is £1,000/year for 2023/24.
Above £1,000, you will pay the following rates of tax on dividend income received from your company:
- 8.75% on income within the basic-rate tax band (£12,571 to £50,270)
- 33.75% on income within the higher-rate tax band (£50,271and £125,140)
- 39.35% on income within the additional rate tax band (above £125,140)
Dividend income is still paid from post-tax profits, so your company will continue to pay Corporation Tax on these profits before you pay yourself dividends. The idea behind the changes was to discourage people from setting up a company simply to pay less tax – i.e., by taking most of their income as dividends rather than as a wage.
Instead, the government hopes to incentivise company owners to receive dividends through shares held in ISAs and pension schemes. Also, they want you to pay more tax.
Either way, you’re still better off setting up your business as a limited company, rather than operating as a sole trader. You just have to be strategic with your tax planning and remuneration, which any decent accountant or tax advisor will be able to assist you with.
Class 2 and Class 4 National Insurance Contributions
Whilst not applicable to directors unless they are also shareholders and/or they receive additional untaxed income on top of their salaries, it’s worth mentioning these types of National Insurance for clarity.
Class 2 and Class 4 National Insurance are both paid through Self Assessment by people a number of people, including:
- self employed individuals (i.e., sole traders and members of partnerships)
- people who receive income that is not taxed through PAYE (e.g., shareholders)
- individuals who do not pay Class 1 NIC through PAYE on certain types of taxable income (e.g., directors in receipt of expenses, directors’ loans, or untaxed bonuses)
Class 2 National Insurance is payable when earnings exceed the lower profits threshold of £12,570. It is charged at a rate of £3.45/week.
You need to pay Class 1 or Class 2 NIC to protect your entitlement to the State Pension and benefits, so it’s really important that you are making one of these contributions, depending on whether you are employed or self-employed.
Class 4 National Insurance is charged at a rate of 9% on untaxed income above £12,570 (the lower profits limit) up to £50,270 (upper profits limit). Income above the upper profits limit is liable to 2% Class 4 NIC.
If you receive any form of untaxed income from the company or elsewhere (e.g., dividends from shares, a director’s loan, rental income, etc), you must register for Self Assessment to report this income and pay any additional tax and National Insurance that may be due.
The same rule applies if you are not a PAYE employee of the company but you receive shareholder dividends from the business. In such instances, you must register for Self Assessment, file an annual tax return to report your income, and pay any necessary Dividend Tax and voluntary NIC on your earnings.
Hello, I am currently employed and paid through paye and earn above the personal tax allowance. I have just purchased a small deli business. I am unsure whether to operate the business as a sole trader or as a Ltd Company for tax purposes. Are there any tax and NI benefits to operating as a Ltd company if I have already exceeded my personal tax allowance elsewhere? I hope I have explained well enough for you to understand my question. Thank you
Thank you for your kind query, Angie.
Given your scenario, and that you already earn above the personal allowance elsewhere via PAYE, it is likely that in the short term it is more sensible to pay yourself as a sole trader. However, you should factor non-tax related benefits that limited companies provide before making a decision of this magnitude, such as the prestige that a limited company provides, and the protection it provides yourself and your personal assets should the business fail.
We trust this information is of use to you.
Regards,
The QCF Team
Does a non executive statutory director still have to pay corporate tax and any other tax?
Thank you for your kind enquiry, John.
To clarify, only limited companies are required to pay corporation tax – not individuals. Therefore, a Non-Executive statutory director would never have to pay Corporation Tax. In general terms, most Non-Executive Directors are not employees of the company and maintain a directors’ service contract with the company. This means they will need to file a Self Assessment tax return and will be required to pay income tax should their income go above the Personal Allowance threshold.
I trust this information is of use to you.
Kind regards,
Nicholas
Do I have to register for a self assessment if I’m a director of a ltd company but it has not started trading yet?
Thank you for your kind enquiry, Kate.
In general terms, a director of a limited company needs to register for self assessment if they are in receipt of dividends or untaxed income from a limited company. If the company has never traded, there is no requirement to register for self assessment, as all declarations would be nil.
I trust this information is of use to you.
Regards,
Nicholas
1st question:
A Ltd administrator can earn £ 8840 tax free, or up to £ 12,570 by paying NI. I am a foreign administrator residing permanently in Italy, which benefits from the double taxation agreement. Do I have to pay National Insurance if I exceed the amount of £ 8840?
2nd question:
What is the cumulative period on which the total amount received by the administrator is based (example: from January to December, or from April 6 to April 5 of the following year, or on the basis of the fiscal year of the Ltd)?
Thanks in advance for your answer
No problem at all, Davide!
Regards,
The QCF Team
Thank you for your kind enquiry, Davide.
In general terms, you do not need to pay National Insurance contributions in the UK if you have a document proving you pay social security contributions in Italy. For more information, see this link: https://www.gov.uk/guidance/social-security-contributions-for-workers-coming-to-the-uk-from-the-eea-or-switzerland
With regards to the period on which the total amount is calculated – this is based on the financial year April 6 to the following April 5.
We trust this information is of use to you. Should you require further assistance, please do not hesitate to post a following up comment.
Regards,
The QCF Team