How to Pay Yourself a Salary or Dividends as a Director of Your Own Limited Company

As a director of your own limited company in the UK, you can pay yourself through salary, dividends, or a combination of both. This is important because how to take income from your company can significantly affect your tax bill, your pension entitlement, and the amount of paperwork you need to complete. This guide explains how to take income in the most tax-efficient way for the upcoming tax year.

How Can I Pay Myself as a Limited Company Director?

Limited company directors can take income from their business in three ways:

1. Salary – Limited company directors can pay themselves a salary as employees of their own company through the HMRC’s Pay As You Earn (PAYE) system
2. Director dividends – Dividends are paid from the company’s post-tax profits and are usually taxed at lower rates than salary
3. A combination of salary and dividends – This method uses a modest salary supported by dividends to achieve a more tax-efficient overall outcome.

What Is the Optimal Way to Pay Myself as a Company Director?

Many directors with their own limited company choose to keep their salary at a low level and take the rest of their income as dividends. This approach helps control tax and National Insurance costs. The optimal director salary depends on your circumstances, your company’s profits, and your personal tax plan. It also depends on the level of income you want to extract and how long you plan to keep the business running. 

As the rules change each tax year, it is important to check your remuneration strategy often to make sure you are still using the most tax-efficient method available. 

The three most tax-efficient director salary levels for 2025/26 are as follows.

• £5,000 per year (Secondary Threshold) 
• £6,500 per year (Lower Earnings Limit), or
• £12,570 per year (Primary Threshold and Personal Allowance) 

As we will discuss in the next section, the level of salary you choose to pay yourself should be based on the Class 1 National Insurance (NIC) thresholds and your personal allowance. If you are unsure, a trusted accountant will be able to explain the best overall strategy for you.

What Are the National Insurance (NIC) Thresholds?

The National Insurance (NIC) thresholds affect how much a director pays in NICs and whether they receive pension credits. These thresholds also influence your optimal director salary.

The key NIC threshold levels for 2025/26 are:

• Lower Earnings Limit: £6,500 – A salary at this level gives National Insurance credits without paying any NICs
• Primary Threshold: £12,570 – Employee National Insurance starts once earnings go above this point
• Secondary Threshold: £5,000 – Employer National Insurance becomes payable on earnings above this level
• Upper Earnings Limit: £50,270 – Employee NICs drop from 8% to 2% on income above this figure.

Choosing a salary at one of these key levels can make payments more tax-efficient. A salary at the Lower Earnings Limit gives National Insurance credits without paying NICs. This will help to protect your state pension entitlement.

What Is the Employment Allowance?

The Employment Allowance is a government scheme that lets eligible employers reduce their annual bill for employer Class 1 National Insurance contributions (NICs) by up to £10,500. This reduces the cost to the company of putting salaries through payroll, which can make taking a higher director’s salary more tax‑efficient. 

When Employment Allowance is available, it can offset the employer NIC due on a director’s salary between £5,000 and £12,570, rather than that NIC having to be paid out of company funds. This means a director’s salary at £12,570 (the personal allowance level) is often more attractive, because the company keeps more profit after NIC and Corporation Tax.

A company can usually claim the Employment Allowance if:  

• It pays employer Class 1 NICs
• It has at least two people on the payroll who each earn above the Secondary Threshold, which can include directors.

A company cannot claim the Employment Allowance if it has a single director and no other employees.

What Are the Pros and Cons of Taking a Director’s Salary?

Advantages	Disadvantages
Reduces Corporation Tax as salary is a deductible expense	Less tax-efficient than dividends due to NICs
Builds National Insurance credits	Requires PAYE registration and regular RTI submissions
No extra personal tax if salary stays within the Personal Allowance	Penalties apply for late RTI
Simple payroll process with software	Fixed payment timings because of RTI rules
Helps with mortgage applications	Employee NICs apply above £12,570

What Are Limited Company Dividends?

Dividends are payments made to shareholders from company profits. The company must have enough profits before paying dividends. Profits must be calculated after Corporation Tax has been deducted. The tax advantages of dividends are that rates are lower than Income Tax on salary, and no National Insurance applies to dividend income. A director must be a shareholder to receive dividends. Payments must reflect the number of shares held by each shareholder.

Dividend Tax Rates and Allowances for 2025 to 26

The dividend tax allowance is the amount of dividend income you can receive in a tax year before you have to start paying dividend tax on it. The amount remains at £500 for 2025/26. The tax rates for dividends depend on the recipient’s Income Tax band. These rates are below the standard rates for salary, making dividends attractive for many directors.

To calculate the tax band, add your salary income to your dividend income. As the tax rules change frequently, it is important to keep up to date with the current dividend rates. 

Income Tax Band	Dividend Tax Rate
Personal Allowance (up to £12,570)	0%
£500 Dividend Allowance	0%
£12,571 to £50,270	8.75%
£50,271 to £125,140	33.75%
Over £125,140	39.35%

All dividends above the allowance must be reported through Self Assessment. 

What Are the Pros and Cons of Taking Dividends?

Advantages	Disadvantages
Dividends are more tax-efficient than a salary	Cannot be paid without distributable profits
No NICs payable	Requires meetings, minutes, and dividend vouchers
No PAYE or RTI obligations	Corporation Tax applies before dividends
Flexible payment timing	No state pension credits
Lower tax rates (8.75%, 33.75%, 39.35%)	Must complete Self Assessment
Tax due months after year-end	Risk of taking dividends when there are insufficient profits

Example of How to Pay Yourself in a Tax‑Efficient Way

In this scenario, the company has profits of £60,000 before any payments to the director. The director takes a £12,570 salary. Employer NICs of £1,136 would normally apply, but these are fully covered by the Employment Allowance.

• After deducting the salary, the company’s taxable profit is £47,430. Corporation Tax on this amount will be roughly £9,000 to £9,500, depending on the exact rate applied. This leaves approximately £37,900 to £38,400 available for dividends.

• Personal tax on these dividends will be in the region of £3,200 to £3,400, depending on the director’s final tax band and the £500 dividend allowance.

• If the director took the entire £60,000 as salary, the combined Income Tax and NIC bill would be about £22,500 to £23,000. Using the salary plus dividend method reduces this to approximately £13,000 to £14,000.

Corporation Tax Considerations

A director’s salary reduces Corporation Tax because it is a deductible expense. The 2025 to 26 rates are:

• 19% for profits up to £50,000
• 25% for profits above £250,000
• Marginal Relief applies between these levels

Administration of Salary and Dividends

When you take income as a director, there are a few administrative tasks you must keep on top of. These duties apply whether you take a salary, dividends, or both. If you pay yourself a salary, you need to register your company for PAYE with HMRC and send a Full Payment Submission on or before each payday and provide payslips showing your pay for that period. At the end of the tax year, you also need to file your payroll information through the PAYE system.

If you take dividends, you must hold a short board meeting to approve each payment and note the decision in meeting minutes. You also need to issue dividend vouchers showing the details of each dividend. These records must be kept for at least six years. Any dividend income must be reported through Self Assessment by 31^st January.

Many directors use payroll software or an accountant to handle these tasks, which keeps everything compliant and reduces the risk of errors.

How Can I Protect My State Pension Entitlement?

It is important to remember that you will need at least 35 qualifying years to receive your full state pension. Paying yourself a director’s salary below £6,500 earns no credits. A salary of £6,500 or above gives credits without paying NICs. A salary of £12,570 also earns credits but may trigger employee NICs above that point. Directors taking only dividends earn no credits. For these reasons, when you decide on how best to pay yourself, it is important to ensure you will not affect your pension entitlement.

Final Words

For most directors, a salary at one of the key National Insurance thresholds, £5,000, £6,500, or £12,570, combined with dividends, offers the most tax-efficient income strategy. How you pay yourself will affect your tax liabilities, the amount of paperwork you need to do, and your future pension provision. Remember, this is not a one-off decision. We always recommend that directors review their personal circumstances each year and consider professional advice to keep their approach effective.