One of the first questions anyone asks when they set up a limited company is: how do I actually get money out of it? You can't just transfer cash from the business account to your personal account whenever you feel like it — well, you can, but it needs to go through the right channels or HMRC will come knocking. The good news is that done properly, a combination of salary and dividends is generally more tax-efficient than paying yourself a full salary — sometimes significantly so.
Here's how it works in practice for 2026/27.
The basic structure: low salary, top up with dividends
The standard approach for a director/shareholder of a small limited company is to pay yourself a modest salary through payroll and then take the rest of your drawings as dividends from the company's post-tax profits. This works because salary and dividends are taxed differently. Salary is subject to both income tax and National Insurance (employee's and potentially employer's NI). Dividends are taxed at lower rates and attract no National Insurance at all.
The key question is what salary to set. There are two main options that get discussed, and which one is right for you depends on your specific situation.
Option 1: Salary at the secondary NI threshold (£5,000)
Setting your salary at £5,000 means neither you nor the company pays any National Insurance on it. The employer's NI threshold (secondary threshold) sits at £5,000 for 2026/27, so a salary up to that amount costs the company nothing beyond the salary itself. At this level you also won't pay any employee NI or income tax, since you're well below the personal allowance.
The downside is that a salary of £5,000 only counts as 5 qualifying weeks for your State Pension record. You need 35 qualifying years to get the full new State Pension, so if you're decades from retirement this may not matter much — but if you're later in your career it's worth factoring in.
Option 2: Salary at the personal allowance (£12,570)
Setting your salary at £12,570 means you use your full personal allowance and pay no income tax on the salary. You will, however, pay employee National Insurance on the portion above £12,570 — but since we're setting the salary at exactly £12,570, there's no employee NI either. You will trigger employer's NI on the portion above £5,000, which is currently 15% on the excess, so on a salary of £12,570 that's roughly £1,136 of employer NI that the company must pay on top of your salary.
The reason some people prefer this option is that the employer NI is a deductible business expense, and at the 19% corporation tax rate it generates a saving of around £216. More importantly, a salary of £12,570 gives you a full qualifying year for State Pension purposes. So the net extra cost of going from £5,000 to £12,570 is not enormous — but you need to weigh it against your personal circumstances.
There is also a nuance worth knowing: if your company is eligible for the Employment Allowance (which offsets the first £10,500 of employer NI), then the employer NI on a salary of £12,570 effectively disappears. Most single-director companies are NOT eligible for the Employment Allowance — HMRC excludes companies where the sole employee is also a director. But if you have other employees, you may qualify, which makes the £12,570 salary a clear winner.
Taking dividends on top
Once you've set your salary, the rest of your personal drawings from the company typically come as dividends. Dividends are paid from profits after corporation tax, so the money has already been taxed once before it reaches you.
For 2026/27, the dividend allowance is £500 — meaning the first £500 of dividend income each year is tax-free. Beyond that, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate), depending on your total income for the year.
An important practical point: dividends can only be paid from retained profits. If the company hasn't made any profit, or has already distributed all of it, you can't lawfully pay a dividend. Directors who take dividends when there are no distributable profits are making unlawful distributions — and HMRC is well aware of this.
A worked example
Say your company makes £80,000 of profit before your salary. You pay yourself a salary of £12,570. The company then pays corporation tax on the remaining £67,430 at 19%, which comes to £12,812. That leaves £54,618 of post-tax profit available to distribute as dividends.
You take £54,618 as dividends. Your total income is £12,570 (salary) + £54,618 (dividends) = £67,188. After your personal allowance of £12,570, your taxable income is £54,618 of dividends. The first £500 is covered by the dividend allowance. You pay 8.75% on the next £37,200 (the remaining basic rate band), which is £3,255. Then 33.75% on the remaining £16,918 of dividends that fall into the higher rate band, which is £5,710.
Total personal tax: roughly £8,965. Combined with the £12,812 corporation tax, total tax on £80,000 of profit is around £21,777 — an effective rate of about 27%. A sole trader on the same profit would pay significantly more once you factor in Class 4 NI and higher-rate income tax.
What about loans from the company?
Some directors are tempted to just lend themselves money from the company rather than declaring salary or dividends, to defer tax. HMRC has specific rules about this — a director's loan outstanding nine months after the company's year end triggers a 33.75% corporation tax charge on the outstanding balance (the Section 455 charge). That tax is recoverable when the loan is repaid, but it creates a cash flow headache. It's generally not a strategy worth pursuing unless you genuinely intend to repay the loan within the accounting period.
Timing your dividends
One genuine advantage of dividends over salary is flexibility around timing. If your income varies year to year, you can declare dividends in years where you have remaining basic rate band available, and hold off in years where you've already used it. This requires decent record-keeping and ideally management accounts, but it's a legitimate and worthwhile planning tool.
Before year end, it's worth reviewing your position: how much profit has the company made, how much basic rate band do you have left personally, and whether it makes sense to declare a dividend before or after the company's year end. This is the kind of thing an accountant earns their fee on.