What Should a Director Pay Themselves?
If you run a limited company, one of the most important financial decisions you will make is how to pay yourself.
Salary or dividends?
This is not just a tax question. It affects your personal tax position, your company’s Corporation Tax bill, your National Insurance record, mortgage applications and long-term compliance with HM Revenue & Customs.
Let’s break it down clearly.
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The Key Difference
A salary is paid through PAYE. It is a business expense and reduces company profit.
Dividends are paid from profits after Corporation Tax. They are not a business expense.
That single difference drives most of the planning.
Paying Yourself a Salary
If you pay yourself a salary as a director:
- It must go through payroll
- Income tax is deducted via PAYE
- Employee National Insurance may apply
- Employer National Insurance may apply
- The company receives Corporation Tax relief on the salary
The personal allowance remains £12,570. Many directors choose to set salary around the National Insurance thresholds to preserve state pension entitlement while keeping NIC low.
A common strategy is:
- Salary at or near the Primary Threshold
• Dividends for the remainder
This keeps employer National Insurance manageable while still qualifying for state benefits.
However, this must be calculated carefully.
Salary levels affect:
- Employer NIC costs
- Auto enrolment pension obligations
- Eligibility for Employment Allowance
- Personal tax coding
This is not something to guess.
Paying Yourself Dividends
Dividends can only be paid from retained profits.
If your company has not made profit, you cannot legally declare dividends. Paying dividends without sufficient reserves creates an unlawful dividend. That can cause serious compliance issues.
Dividend tax rates for 2025–2026 are:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
The dividend allowance remains low at £500. That means most dividend income is taxable.
For the 2026/27 tax year, the dividend tax rates will be as follows:
- Basic rate taxpayer: 10.75% (up from 8.75%)
- Higer rate taxpayer: 35.75% (up from 33.75%)
-
No change on additional rate taxpayer
These changes are effective from 6th April 2026
Dividends are not subject to National Insurance, which is why they are often more tax efficient than pure salary.
But they must be properly documented:
- Board minutes
- Dividend voucher
- Confirmation of available reserves
Without documentation, HMRC may challenge the treatment.
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A Simple Example
Let’s say your company makes £60,000 profit before director pay.
Option 1: Pay full salary of £60,000.
The company gets Corporation Tax relief on the salary, reducing taxable profit to zero. But employer National Insurance and PAYE will apply. You may pay significant personal tax and NIC.
Option 2: Pay £12,570 salary and the rest as dividends.
The company pays Corporation Tax first on remaining profits. Then dividends are declared from after-tax profit. Overall personal tax and NIC are often lower than salary-only.
This is why a blended approach is commonly used.
But it only works if profits are sufficient and cash flow supports it.
What Directors Often Get Wrong
The most common mistakes I see:
Taking money out without recording it correctly
Treating all withdrawals as dividends without checking profits
Ignoring director loan account balances
Forgetting employer National Insurance
Not planning for personal tax payments in January
When dividends are declared without sufficient profit, the amount may be reclassified as a director loan. If that loan is not repaid within nine months of year end, a Section 455 tax charge at 33.75% can apply.
That catches directors by surprise.
Other Factors You Must Consider
It is not just about tax rates.
You should also consider:
- Mortgage affordability. Lenders often prefer consistent salary.
- Maternity or paternity benefits. These are salary linked.
- Pension contributions.
- Cash flow timing.
- Business reinvestment needs.
A company that distributes everything leaves no buffer for growth or unexpected tax bills.
There Is No One Size Fits All
For a small profitable company with one director, a modest salary plus dividends is often efficient.
For companies with multiple shareholders, group structures or fluctuating profits, planning becomes more technical.
What worked last year may not work this year if profit levels change.
And legislation continues to evolve. Dividend allowance reductions and Corporation Tax band changes mean strategies must be reviewed annually.
Final Thoughts
Salary versus dividends is not a casual choice. It is a structured decision that should be reviewed alongside:
- Corporation Tax
- Personal tax
- Cash flow
- Compliance risk
Getting it wrong can result in unexpected tax bills, penalties and avoidable stress.
Getting it right protects both your business and your personal finances.
If you are unsure whether your current structure is tax efficient or compliant, or if you are simply taking drawings without clarity, now is the time to review it properly.
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About the Author
Written by Yesim Tilley Founder of Skynet Accounting is a chartered accountant with over 20 years of experience supporting manufacturing and engineering businesses across the UK. Specialising in cost analysis, product costing, and financial strategy, she helps industrial businesses understand their numbers and make more profitable and sustainable decisions. Skynet Accounting provides tailored finance, compliance, and taxation support for business owners.