To pay yourself from a limited company, run a modest salary through PAYE and take the rest as dividends from the company’s post-tax profits. That combination keeps your income tax and National Insurance low while staying within the rules. You can also route money out through employer pension contributions, expense reimbursements, and, cautiously, a director’s loan. Each has different tax consequences, and mixing them well can save you thousands of pounds a year.
The starting point is that a limited company is a separate legal entity. Its money is not your money until you formally extract it, and how you extract it decides the tax.
Why a Salary Plus Dividends Beats Either Alone
Salary is taxed as employment income. Dividends are taxed at lower rates and carry no National Insurance at all, for you or the company. That gap is the whole reason director-shareholders don’t just pay themselves a wage.
But you can’t rely on dividends alone either. A small salary builds your National Insurance record toward the state pension, and it’s a deductible business expense that trims the company’s Corporation Tax bill. The standard approach is a salary set at a specific threshold, with the rest of your income coming from dividends once the company has paid its Corporation Tax on profits.
Setting the Salary: The £12,570 Sweet Spot
Any salary must go through PAYE, even if you’re the only director. The company registers as an employer with HMRC, sets up payroll software, and deducts income tax and National Insurance before the money hits your account.1GOV.UK. Register as an Employer
For 2025/26, the personal allowance is £12,570, so you pay no income tax on the first £12,570 of income. Above that, income tax runs at 20% up to £50,270, 40% up to £125,140, and 45% beyond.2GOV.UK. Income Tax Rates and Personal Allowances
National Insurance sits on top. As an employee-director you pay 8% between the primary threshold (£12,570) and the upper earnings limit, then 2% above. The company pays employer’s NI at 15% on earnings above the secondary threshold of just £96 a week, roughly £5,000 a year.3GOV.UK. Rates and Allowances: National Insurance Contributions That employer rate is a real cost to the business and is why most directors keep salary low.
A salary of £12,570 lines up cleanly with three thresholds at once. You owe no income tax (it matches the personal allowance). You owe no employee NI (it sits at the primary threshold). And you get a qualifying year toward the state pension, which you would lose if you dropped below the lower earnings limit.
The company still pays employer’s NI at 15% on the portion above the £5,000 secondary threshold, working out to roughly £1,136 on a £12,570 salary. That cost is itself deductible against Corporation Tax, softening the blow.
Taking Dividends From Company Profits
Dividends come out of distributable profits, defined by the Companies Act 2006 as accumulated realised profits minus accumulated realised losses.4Legislation.gov.uk. Companies Act 2006 – Section 830 If the company hasn’t made enough profit to cover a dividend, the payment is unlawful regardless of how much cash is in the bank. This catches new directors out more than you’d expect, and if a dividend turns out to have been unlawful, directors can be personally liable to repay it.
Corporation Tax comes off profits before any dividend is paid. For accounting periods from April 2025, the small profits rate is 19% on profits up to £50,000, the main rate is 25% above £250,000, with marginal relief between.5GOV.UK. Corporation Tax Rates and Allowances
Once the company has paid its tax, the remaining profit can be distributed. Every shareholder receives dividends in proportion to the number and class of shares they hold. You can’t pay one shareholder more than their shareholding entitles them to, which matters in family companies where a spouse or partner also holds shares.
On your personal side, the first £500 of dividends each year is tax-free under the dividend allowance. Beyond that, dividend tax is 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band. No National Insurance applies.
A worked example: a director on a £12,570 salary who takes £40,000 in dividends pays no income tax and no employee NI on the salary. On the dividends, the first £500 is covered by the allowance. The remaining £39,500 sits in the basic rate band and is taxed at 8.75%, giving a dividend tax bill of roughly £3,456. Taking the same total as pure salary would produce a substantially larger income tax and NI bill.
Employer Pension Contributions
If you don’t need all the cash now, having the company pay directly into your pension is one of the most tax-efficient extractions available. Employer pension contributions are deductible against Corporation Tax, and neither you nor the company pay National Insurance on them.
The contributions must satisfy the “wholly and exclusively” test for business purposes. HMRC generally accepts employer contributions for working directors as meeting it.6GOV.UK. BIM37007 – Wholly and Exclusively: Overview The annual allowance caps how much can go in with tax advantages each year, so check the current threshold before making large contributions. Going over it triggers a charge that wipes out the benefit.
Reimbursing Yourself for Business Expenses
When you spend your own money on something the company needs, the company reimburses you. That reimbursement isn’t personal income. No income tax, no NI, no dividend tax. The company also claims the expense as a deduction against its profits.
The catch is the same “wholly and exclusively” rule. If any part of the spending has a personal element, the whole amount fails the test, with no provision to split out a business proportion.6GOV.UK. BIM37007 – Wholly and Exclusively: Overview Travel to a client site qualifies. A laptop used only for work qualifies. A meal where you also caught up with a friend does not, even if some business was discussed.
Keep every receipt and log the date, vendor, amount, and business reason. HMRC can open an enquiry years after the fact, and without documentation the reimbursement can be reclassified as income and taxed.
Director’s Loans: Use Sparingly
A director’s loan account tracks money moving between you and the company that isn’t salary, dividends, or expense reimbursements. If you take out more than you’ve put in, the account is overdrawn and you owe the company money. That’s where it gets expensive.
The S455 Charge
If an overdrawn balance is still outstanding nine months and one day after the end of the company’s accounting period, the company pays S455 tax at 33.75% of the outstanding amount.7GOV.UK. Director’s Loans: If You Owe Your Company Money It’s a separate Corporation Tax charge, not a penalty on top. When you repay the loan the company can reclaim S455, but not until nine months and one day after the end of the accounting period in which the repayment was made.8GOV.UK. Reclaim Tax Paid by Close Companies on Loans to Participators (L2P) The money can be tied up for a long time.
Benefit in Kind Over £10,000
If the loan exceeds £10,000 at any point in the tax year and you pay less than HMRC’s official rate of interest (or none), the shortfall is a taxable benefit in kind.7GOV.UK. Director’s Loans: If You Owe Your Company Money The company reports it on form P11D and pays Class 1A National Insurance. You pay income tax on it through self-assessment. Below £10,000 this benefit in kind doesn’t apply.
Treat director’s loans as a short-term bridge, not a routine extraction method. Repeatedly drawing down and repaying loans to sidestep S455 can bring the “bed and breakfasting” anti-avoidance rules into play.
The Paperwork You Can’t Skip
Each extraction method has its own reporting, and slippage on any of it compounds fast.
Salary
Every time you run payroll, the company submits a Full Payment Submission to HMRC on or before payday, reporting what was paid and what was deducted.9GOV.UK. Running Payroll: Reporting to HMRC: FPS Payroll software handles the maths, but you’re responsible for the submissions going in on time. Late filing triggers automatic penalties.
Dividends
Before paying a dividend, the directors pass a board resolution and record it in minutes. A dividend voucher goes to each shareholder showing the date, company name, amount per share, and total. Vouchers aren’t filed with HMRC but are your proof the dividend was properly declared if HMRC enquires. You report dividends received on your self-assessment return.
Director’s Loans
Outstanding loan balances at the accounting period end are disclosed on form CT600A with the company’s Corporation Tax return.10GOV.UK. Supplementary Pages CT600A: Close Company Loans and Arrangements to Confer Benefits on Participators Any benefit in kind on a loan over £10,000 is reported separately on P11D after the tax year ends.
Expenses
Keep receipts and a log covering the date, what was bought, who from, how much, and why it was needed. HMRC doesn’t want them routinely but can ask, and the company must retain them for at least six years.
Mistakes That Cost Money
The most expensive mistake is taking money out without deciding what it is. If you transfer company funds to your personal account without running payroll or declaring a dividend, the money defaults to a director’s loan and the S455 clock starts. Plenty of new directors learn this at their first year-end.
The next is declaring dividends without checking that distributable profits actually exist. Interim management accounts aren’t optional. If profits turn out to be insufficient, the dividend is unlawful and directors can be personally liable to repay it.
The last is setting the salary too low. Dropping below the lower earnings limit to shave employer NI means the year doesn’t count toward your state pension record. For most directors who’ll rely on the state pension eventually, that’s a false economy. The £12,570 level clears income tax, employee NI, and the state pension qualifying threshold in one move, which is why it’s the default.