What is the most tax-efficient way to pay myself from a limited company?

The optimal way for a limited company director to extract money from their company depends on their total income level, whether they have other income sources, their retirement planning goals, and the company's profitability. The following sets out the standard approach for a director with no other income.

For the 2025/26 tax year, the personal allowance is £12,570. This is the amount of income you can receive before paying any income tax. The strategy is to set your salary at exactly £12,570 per year (£1,047.50 per month) so that it fully utilises the personal allowance with no income tax payable.

At a salary of £12,570 there is no employee income tax. For National Insurance, the lower earnings limit (LEL) is £6,396 per year and the primary threshold (PT) is £12,570 per year. At a salary of exactly £12,570, employee NI is nil (contributions become due only above the primary threshold). Employer NI also becomes due only above the secondary threshold of £9,100 per year. A salary between £9,100 and £12,570 triggers employer NI (13.8% on the excess above £9,100) but no employee NI and no income tax. Some directors choose a salary of exactly £9,100 to avoid both employee and employer NI while still earning qualifying years for the State Pension, at the cost of slightly lower personal allowance utilisation.

The choice between a salary of £9,100 and £12,570 is marginal. At £12,570, the company pays employer NI of £487.86 on the salary between £9,100 and £12,570. This employer NI is itself deductible against Corporation Tax, reducing the net cost. In a 19% Corporation Tax band, the net employer NI cost is roughly £395. Whether this is worth paying for the additional personal allowance utilisation of £3,470 (worth zero income tax at this salary level) depends on the wider picture. Most practitioners recommend £12,570 as it maximises the personal allowance and any future changes to NI thresholds.

Above the salary, dividends are the next most tax-efficient extraction method. The dividend allowance of £500 is tax-free. Dividends falling in the basic rate band (up to total income of £50,270) are taxed at only 8.75%, compared to income tax at 20% plus NI on salary. This means a director can draw approximately £37,700 in dividends (after salary of £12,570) before entering the higher rate band, paying only 8.75% on dividends above the £500 allowance.

Total tax-efficient extraction at basic rate in 2025/26: salary of £12,570 plus dividends of £37,700 = total personal income of £50,270. After the £500 dividend allowance, dividend tax on £37,200 at 8.75% = £3,255. Plus employer NI on salary above £9,100: £487.86. Total personal and employment tax cost: approximately £3,743. The same £50,270 taken entirely as salary would cost approximately £15,300 in income tax and NI.

For those who want to extract more than £50,270, the options are: continue taking dividends at the higher rate of 33.75% (still more efficient than salary at 40% income tax and 2% NI); make employer pension contributions (no NI, Corporation Tax deductible, but money is locked until age 57 from 2028); or reinvest profits in the company and extract as capital gains if the company is later sold (potentially qualifying for Business Asset Disposal Relief at 18% on the first £1 million of gains).

Beyond £100,000, the personal allowance taper creates an effective 60% marginal rate. In this zone, pension contributions are especially valuable as they reduce adjusted net income below £100,000 and restore the personal allowance.

The company must have sufficient distributable profits (retained earnings) to pay dividends. Dividends paid in excess of distributable reserves are illegal dividends, which must be repaid. Track retained earnings carefully, particularly if the company has had a recent loss-making year.

Document each dividend payment with a board minute (even if you are the sole director and shareholder) and a dividend voucher showing the date, amount, and type of dividend. This paper trail demonstrates the payment is a legitimate dividend and not a salary subject to PAYE and NI.

AccountsOS models your salary and dividend combination in the financial overview and shows the tax cost in real time as your income is recorded through the year.