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DirectorsUpdated 2026-10-19

How do I pay myself from my limited company?

Quick Answer

Directors typically pay themselves through a combination of low salary (around £12,570) and dividends. This is more tax-efficient than salary alone due to lower tax rates on dividends.

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Detailed Explanation

Ways to extract money from your company

1. Salary (PAYE) - Subject to Income Tax and National Insurance - Corporation Tax deductible for company - Qualifies for State Pension - Optimal amount: £12,570 (Personal Allowance)

2. Dividends - Only from distributable profits - No NI payable - Lower tax rates than salary - £500 tax-free allowance - Need board minutes and dividend vouchers

3. Employer Pension Contributions - No personal tax or NI - Corporation Tax deductible - Money locked until age 55 (57 from 2028) - £60,000 annual limit

4. Directors' Loan - Borrowing from company - S455 tax if not repaid by year-end - Must be repaid eventually

5. Expenses/Mileage - Reimbursement for genuine business costs - Tax-free to you, deductible for company - Keep proper records

Typical tax-efficient strategy 2026/27

- Salary: £12,570 (uses personal allowance, qualifies for pension) - Dividends: £37,700 (fills basic rate band at 10.75%) - Pension: Remainder up to £60,000 - Total accessible income: £50,270 - Total personal tax: ~£3,999 (dividends only) - Effective rate: ~8.0%

Important

Never take more dividends than profits allow. Illegal dividends must be repaid.

Source: General Tax Planning Guidance

Real-World Examples

Software Consultant Scenario

Sarah runs a limited company as a software consultant. She pays herself a salary of £12,570 per year to utilize her personal allowance and then takes the remaining profits as dividends, after ensuring enough is retained within the company for future investments and tax liabilities.

E-commerce Business Scenario

John operates an e-commerce business through his limited company. He pays himself a small salary, makes employer contributions into his SIPP, and takes the rest as dividends. He ensures accurate dividend vouchers are created to correctly reflect the income taken outside of salary.

Consulting Director Scenario

Emily provides consultancy services and wants to maximise tax efficiency. She's been taking salary only but now starts exploring pension contributions and dividends after reaching out to an accountant. Her plan to reduce her overall tax liability is set after the accountant confirms Emily will still satisfy her national insurance obligations in the coming years.

Common Mistakes to Avoid

  • Forgetting to create formal dividend vouchers for each dividend payment, potentially leading to issues during an HMRC audit.
  • Taking dividends exceeding available distributable profits, which is illegal and can result in the dividend being reclassified as a loan.
  • Failing to accurately declare dividend income on your Self Assessment tax return, resulting in penalties from HMRC.
  • Ignoring the impact of dividend income on your overall tax bracket and potentially pushing yourself into a higher income tax band.

Can my company pay for personal expenses and treat them as business expenses?

Generally, no. Personal expenses paid for by the company are usually treated as benefits in kind, which are taxable as income and may attract Class 1A National Insurance contributions from the company.

What happens if I take more money out of the company than is available in profits?

This could create a director's loan account. If the loan isn't repaid within nine months and one day after the company's year-end, it's treated as a dividend for tax purposes and you'll have to pay income tax on it, plus the company may face a Section 455 tax charge.

Are there any restrictions on how often I can pay myself dividends?

You can pay dividends as often as your company has sufficient distributable profits, but you must document each payment properly with dividend vouchers and board minutes.

What are the tax rates on dividends for the 2025/26 and 2026/27 tax years?

For the 2025/26 tax year, the dividend allowance is £500, and tax rates are: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. For 2026/27 the allowance is still £500 and the additional rate is still 39.35%, but the basic rate rises to 10.75% and the higher rate to 35.75%.

Practical Tips

  • Use accounting software like AccountsOS to track distributable profits in real-time, ensuring you never declare dividends exceeding available earnings.
  • Establish a process for documenting all dividend payments, including creating dividend vouchers with the date, amount, recipient, and the company's name.
  • Consider setting up a SIPP (Self-Invested Personal Pension) and making employer contributions to reduce your corporation tax and avoid personal income tax.
  • Regularly review your salary and dividend strategy with an accountant, especially if your company's profitability fluctuates, to optimize your tax position.

Related Questions

How much salary should I pay myself as a director?

Most single-director companies are best paying a salary of £12,570 per year (the personal allowance) and taking the rest as dividends. A £5,000 salary (the employer NI threshold) is too cautious for most directors.

How much dividend can I take from my company?

You can take dividends up to your company's available profits (retained earnings). There's no legal maximum, but you'll pay dividend tax above the £500 dividend allowance.

What is a Director's Loan Account?

A Director's Loan Account (DLA) tracks money you personally owe to or are owed by your company. It's overdrawn when you owe the company money (borrowed more than you've put in).

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