How to Pay Yourself as a Limited Company Director

One of the first questions anyone asks after setting up a limited company is how to get money out of it. You can't move cash from the business account to your personal one whenever you feel like it. Well, you can, but it has to go through the proper channels or HMRC will come knocking. Done properly, a mix of salary and dividends is generally more tax-efficient than a full salary, sometimes by a wide margin.

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 main question is what salary to set. Three options come up most often, and the right one depends on your 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 is below the Lower Earnings Limit (£6,708 for 2026/27), so it does not count as a qualifying year for your State Pension at all. 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 you should factor it in.

Option 2: Salary at the Lower Earnings Limit (£6,708)

A salary of £6,708 is the lowest level at which a year counts towards your State Pension, and you still pay no employee National Insurance on it (that only starts above £12,570). The company pays employer NI of 15% on the £1,708 above the £5,000 secondary threshold, which comes to about £256. For many directors this is the cheapest way to keep their National Insurance record intact.

Option 3: 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. Employee National Insurance only applies above £12,570, so at exactly that salary you pay none. 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 saves around £216. A salary of £12,570 also gives you a full qualifying year for State Pension purposes. So the net extra cost of going from £5,000 to £12,570 is modest, but you need to weigh it against your own circumstances.

If your company is eligible for the Employment Allowance (which offsets the first £10,500 of employer NI), the employer NI on a salary of £12,570 effectively disappears. Most single-director companies are not eligible, because HMRC excludes companies where the sole employee is also a director. 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, so the first £500 of dividend income each year is tax-free. Beyond that, dividends are taxed at 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate), depending on your total income for the year. The basic and higher rates both went up by two percentage points on 6 April 2026.

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 knows it.

A worked example

Say your company makes £80,000 of profit before your salary and employer National Insurance. You pay yourself a salary of £12,570, which costs the company £1,136 of employer NI (assuming no Employment Allowance). That leaves £66,295 of taxable profit.

Because that profit is between £50,000 and £250,000, marginal relief applies and the company pays 25% less relief. That comes to £13,818, an effective rate of about 20.8% rather than a flat 19%. It leaves £52,476 of post-tax profit, which you take as dividends.

Your salary uses up your personal allowance, so the dividends sit in the basic-rate band first. The first £500 is covered by the dividend allowance. You pay 10.75% on the next £37,200, which is £3,999, and 35.75% on the remaining £14,776 that falls into the higher-rate band, which is £5,283. Your personal dividend tax is £9,282.

Add it all together (£13,818 of corporation tax, £1,136 of employer NI and £9,282 of dividend tax) and the total is roughly £24,200, about 30% of the £80,000 profit. You keep around £55,800.

A sole trader making the same £80,000 would pay about £19,432 of income tax and £2,857 of Class 4 National Insurance, which is £22,289 or 27.9%. In other words, taking all the profit out of a limited company can now cost slightly more tax than being a sole trader. Here is how the two compare at other profit levels (figures rounded to the nearest £10):

These figures assume a £12,570 salary, no Employment Allowance, that you take all the profit out every year, and England, Wales and Northern Ireland tax rates. They also leave out running costs a company has and a sole trader doesn't, such as accountancy fees. The advantages of a limited company today lie elsewhere: leaving profit in the company so it is taxed at corporation tax rates until you need it, paying into a pension through the company, limited liability, and flexibility over when you take dividends. If you plan to withdraw everything every year, run the numbers before you incorporate and talk to an accountant.

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 35.75% corporation tax charge on the outstanding balance (the Section 455 charge; the rate was 33.75% for loans made before 6 April 2026). The tax is recoverable when the loan is repaid, but it creates a cash flow headache. It's generally not worth doing unless you 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, review your position: how much profit the company has made, how much basic rate band you have left personally, and whether it makes sense to declare a dividend before or after the company's year end. An accountant earns their fee on this kind of thing.