Tax rates and allowances for limited company directors

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

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.

How to issue dividends in a company limited by shares

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.

What is an accounting reference date for a limited company?

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.