National Insurance Contributions for Limited Company Owner Directors

As a shareholder/owner and working director of your limited company, you will normally also be an employee.

This leads into the healthy debate of whether you draw salary or dividends or both.

Income Taxes

As an employee, you draw salary under Pay As You Earn (PAYE) for income tax and national insurance contributions with a payslip issued and reported to HMRC under RTI (Real-Time Information) reporting before your net pay is passed to you.  You are taxed in the same way as any other normal ‘employee’.

• £12,570 Personal Allowance usually (unless adjusted by HMRC) = 0%.
• £12,571 - £50,270 (i.e.  next £37,700) = 20% Basic Rate Tax.
• £50,271 - £125,140 (i.e.  next £74,870) = 40% Higher Rate Tax.
• Over £125,140 = 45% Additional Rate Tax.
• Please note income tax thresholds and rates differ in Scotland.

Dividends Paid are Subject to Income Tax at Different Rates

• £500 tax free dividend allowance.
• Dividends when added to your income are in Basic Rate Tax Band are subject to 8.75% tax.
• Dividends when added to your income are in Higher Rate Tax Band are subject to 33.75% tax.
• Dividends when added to your income are in Additional Rate Tax Band are subject to 39.35% tax.

For a Basic Rate Taxpayer with 8.75% dividend tax and an additional £500 dividend allowance versus 20% PAYE income tax, it is clearly tempting to draw a lower salary and wait for your business to generate profit to then draw dividends at a much lower tax rate.

As an employer (including yourself as an employed director), you may also be tempted to draw a lower PAYE salary due to the increase in Employers National Insurance (NIC) contributions from 13.8% to 15% from 1 April 2025 as well as the reduction in the Secondary Threshold (ST – the point at which employers pay NIC for employees is being reduced to starting at salary) down from £9,100 pa to just £5,000 pa.

For more, see: Ltd Co.  Owner Taxes

There is a downside though in that by drawing a lower PAYE salary, this may then restrict

• Your ability to borrow money e.g., for mortgage purposes.
• Restrict personal/private contributions to pension schemes.
• May affect your State Pension Credits if you do not pay National Insurance Contributions to get NIC credits for that year.

National Insurance Contributions Are Different for Owner/Directors Compared to Normal Employees

• Normal employees pay NIC at 8% from £12,584 pa and 2% above £50,284 deducted under PAYE.
• Owner/Directors do not pay any NIC until their PAYE ‘salary’ drawings have physical been paid above £12,570.
• If you draw PAYE at £5,000 pm, after 2 months, you will have only drawn £10,000 PAYE, so no employee NIC yet, but in month 3, you will have been paid £15,000 and that is when you cross £12,570 and NIC will be paid on all drawings over £12,570 in addition to Employers NIC (£5,000 from April 2025).
• If you draw PAYE at £1,050 pam, after 11 months, you will have only drawn £11,550, so no employee NIC yet, but in month 12, you will finally have been paid £12,600 and that is when you have finally crossed £12,570 and NIC will be paid on all drawings over £12,570 in addition to Employers NIC (£5,000 from April 2025).
• You must be careful to ensure that at March pay (Month 12) you ensure you exceed the employees NIC threshold to ensure you get credits towards your state pension.

Be careful with owner/director pay package combinations to minimise your taxes as you must also protect state pension and other benefits (if ever required).

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