How to Pay Yourself Salary and Dividends
Tax-efficient guide to extracting money from your limited company through optimal salary and dividend combinations.
What You'll Need
- HMRC employer registration
- Company bank account
- Personal bank account
- Payroll software or accountant
- Board minutes template
- Dividend voucher template
Step-by-Step Guide
Understand the tax implications
Salary is subject to Income Tax and National Insurance. Dividends have lower tax rates but can only be paid from profits.
- •Dividends have no NI
- •Salary is tax-deductible for the company
- •Optimal mix depends on your situation
Set your salary level
Most directors set salary at £12,570 (Personal Allowance) or £9,100 (Secondary NI Threshold). This maximizes tax efficiency.
- •£12,570 uses full personal allowance
- •£9,100 means no employer NI
- •Both qualify for State Pension
Set up payroll
Register as an employer with HMRC and set up payroll. You can pay yourself monthly or annually.
- •Must report to HMRC via RTI
- •Annual payroll is simpler for directors
- •Use payroll software or accountant
Process your salary payment
Transfer salary from company bank to personal account. Deduct PAYE and NI if applicable. Report to HMRC.
- •Keep payslip records
- •Submit Full Payment Submission (FPS)
- •Pay any PAYE/NI by 22nd of following month
Check company profits for dividends
You can only pay dividends from retained profits (after Corporation Tax). Check your company has sufficient reserves.
- •Cannot pay dividends from share capital
- •Check cumulative profits, not just current year
- •Document in board minutes
Hold a board meeting to declare dividends
Even as sole director, you need board minutes declaring the dividend. Include date, amount per share, and total.
- •Keep written minutes
- •Can be a short document
- •Date must be when dividend declared
Issue dividend vouchers
Create a dividend voucher for each shareholder showing company name, date, amount, and shareholder name.
- •Keep copy for company records
- •Shareholder keeps for Self Assessment
- •Shows dividend is legitimate
Pay the dividend
Transfer dividend amount from company bank to personal account. No deductions at source.
- •Pay to personal account, not joint
- •Reference as 'Dividend'
- •Tax paid via Self Assessment
Report on Self Assessment
Declare dividend income on your personal Self Assessment tax return. Tax is due by 31 January following tax year end.
- •£500 dividend allowance is tax-free
- •Basic rate: 8.75%
- •Higher rate: 33.75%
Common Mistakes to Avoid
Paying dividends without sufficient profits
Not holding board meeting to declare dividends
Forgetting to report dividends on Self Assessment
Not keeping dividend vouchers
Frequently Asked Questions
What is the most tax-efficient salary for a company director in 2025/26?
Most directors pay themselves a salary at the NI Primary Threshold (£12,570 for 2025/26), which avoids both income tax and employee NI contributions while still qualifying for state pension. The remaining profits are then taken as dividends.
Do I need to run payroll to pay myself a salary?
Yes, if you pay yourself a salary you must register as an employer with HMRC and run payroll. This means submitting Real Time Information (RTI) reports each pay period, even if you are the only employee. PAYE and NI must be calculated and reported.
How are dividends taxed for company directors?
Dividends are paid from post-Corporation Tax profits. The first £1,000 of dividends is tax-free (2024/25 allowance). Above that, basic rate taxpayers pay 8.75%, higher rate 33.75%, and additional rate 39.35% on dividend income.
Can I pay myself dividends monthly?
Yes, you can declare and pay dividends at any frequency as long as your company has sufficient retained profits. Each dividend payment should be documented with board minutes and a dividend voucher. You cannot pay dividends from a company that has no distributable reserves.
What is the difference between salary and dividends for tax purposes?
Salary is a deductible business expense that reduces Corporation Tax but attracts income tax and NI contributions. Dividends are paid from post-tax profits and attract lower tax rates but no NI. The optimal split depends on your total income and company profits.
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