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.

Tips

•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.

Tips

•£12,570 uses full personal allowance
•£9,100 means no employer NI
•Both qualify for State Pension

Set up payroll

Tips

•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.

Tips

•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.

Tips

•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.

Tips

•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.

Tips

•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.

Tips

•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.

Tips

•£500 dividend allowance is tax-free in 2026-27
•Basic rate from 6 April 2026: 10.75%
•Higher rate from 6 April 2026: 35.75%

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. For 2026-27 the first £500 of dividends is tax-free. Above that, from 6 April 2026, basic rate taxpayers pay 10.75%, higher rate taxpayers pay 35.75%, and additional rate taxpayers pay 39.35%.

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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