One of the most frequently asked questions from new company directors is: 'How do I actually pay myself?' Unlike employment, where your employer handles everything, as a director of your own company you have choices about how to extract money — choices that have significant tax implications. Getting this right is one of the most impactful financial decisions you will make.
The Two Main Methods
As a director-shareholder of your limited company, you can pay yourself through:
- Director's salary (via PAYE): A regular salary processed through payroll, subject to Income Tax and National Insurance.
- Dividends: Payments from the company's after-tax profits to shareholders, taxed at lower dividend rates.
Why the Combination Strategy is Most Efficient
Most director-shareholders use a combination of a low salary and dividends. Here is why:
A salary up to the National Insurance threshold (£12,570 in 2025/26) keeps you within the PAYE system (which matters for state pension entitlement) with zero Income Tax and zero National Insurance. Beyond this threshold, Income Tax at 20%+ and NICs at 8%+ make salary increasingly expensive.
Dividends, paid from after-tax company profits, are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) — always lower than the equivalent salary rates.
The Optimal Director Salary for 2025/26
For the 2025/26 tax year, the recommended director salary for single-director companies is £12,570 per year (£1,047.50 per month). This is:
- Above the Lower Earnings Limit (£6,396) — so you get National Insurance credit towards your state pension and benefits
- Below the primary threshold for employee NICs (£12,570) — so no employee NICs are due
- Below the Income Tax personal allowance — so no Income Tax is due
- Deductible as a business expense, reducing the company's Corporation Tax bill
How Dividends Work
Dividends can only be paid from distributable profits — profits remaining after Corporation Tax has been paid (or accrued). You cannot pay dividends if the company has insufficient retained profits to cover them; doing so is an illegal distribution.
Dividends must be declared by the directors and properly documented with a board resolution and dividend voucher. Every shareholder of the same class of share receives the same dividend per share.
Each individual has a dividend allowance (£500 in 2025/26) within which dividends are tax-free. Above this, dividend income is added to your other income to determine which tax band applies.
Example: Tax Comparison for £60,000 Income
To illustrate the tax saving, consider extracting £60,000 from your company:
- As a salary: Effective combined tax and NIC rate of approximately 27–32%, costing around £18,000–£19,000 in tax
- As salary (£12,570) + dividends (£47,430): Total personal tax of approximately £4,000–£5,500, plus £12,570 × 19% ≈ £2,400 Corporation Tax on the salary — significantly lower overall
- Exact figures depend on company profits, other income, and specific tax reliefs — always confirm with a qualified accountant
Other Ways to Extract Value
Beyond salary and dividends, directors can also receive:
- Employer pension contributions: Tax-free to the individual and a company expense (reducing Corporation Tax). Up to £60,000 per year (2025/26 annual allowance).
- Expenses reimbursement: Legitimate business expenses paid by the director and reimbursed by the company are tax-neutral.
- HMRC mileage allowance: 45p per mile for first 10,000 business miles (25p thereafter) if using a personal vehicle.
Frequently Asked Questions
Can I pay myself any amount I want as a director?
You can set your own salary as director, but it must be reasonable and reflect genuine services rendered. For dividends, you can only pay what the company has in distributable profits. Very high salaries or distributions disproportionate to company profits may attract HMRC scrutiny.
Do I need to set up payroll to pay myself a salary?
Yes. Even if you are the only employee/director, you must register as an employer with HMRC, set up PAYE, and run payroll — even for a small salary. Most accountants and payroll software can handle this efficiently.
What paperwork do I need to pay dividends?
You need a board resolution declaring the dividend and a dividend voucher for each dividend payment. These should be created and stored for each dividend, even informal ones between you and your partner or co-director.
Can I pay myself a different amount than other shareholders?
If you have multiple share classes (alphabet shares), each class can receive different dividend amounts. With a single class of shares, all shareholders receive the same dividend per share.
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