How to pay yourself in dividends and salary as a director

Introduction

Owning a limited company gives you the flexibility to control your income – but how should you pay yourself as a director using dividends vs salary? Salary helps you secure State Pension credit and Corporation Tax relief. Dividends are taxed at lower rates and help avoid National Insurance. Reclaiming business expenses further reduces your company's tax bill. Most UK company directors blend these approaches depending on their needs.

Best way to pay yourself as a director: Salary, dividends, or both?

After setting up a limited company, one of your first key decisions is how to take income to suit your needs. You can pay yourself salary, dividends or a mix of the two to meet a wide range of business and personal goals.

You can issue a salary at any frequency – but you must register as an employer and set up and run a PAYE scheme, which ensures all tax and National Insurance Contributions (NICs) are reported and paid to HMRC. You can also pay dividends at any time, providing your company has made enough profit.

The right strategy depends on several factors, including whether you plan to apply for a mortgage or loan, have other sources of personal income, such as from property, or prefer a more stable income.

How to pay yourself a salary from a limited company

Most directors pay themselves some salary because it provides a consistent, regular income to meet personal outgoings. A salary is a deductible expense, so it reduces your Corporation Tax and can also give you a qualifying year towards your future State Pension. However, you may need to pay some Income Tax and NICs if it’s above certain thresholds.

A common approach is to pay yourself a small salary and the rest of your remuneration in dividends. This can maximise your use of the Personal Allowance (PA), save Corporation Tax, and ensure you achieve a State Pension qualifying year.

Paying the rest in dividends can avoid employee’s NICs, and use dividend tax rates, which are lower than those for Income Tax and NICs combined, making this an efficient strategy.

Income Tax and National Insurance rates

The PA is the amount of income an individual can earn each year without having to pay Income Tax. If you earn over £100,000, the standard PA tapers down by £1 for every £2 you earn above that level. So, when your income reaches £125,140, your PA becomes zero.

This table shows the UK Income Tax rates you will pay on your director’s salary if you have a standard PA. All figures are accurate for the 2025/26 period.

The tax bands and rates are different if you live in Scotland, and are as follows:

You’ll also pay employee’s and employer’s NICs on your salary if it exceeds certain thresholds.

How to set up payroll

If you pay more than the Lower Earnings Limit (£542 a month for 2025/26), your company must enrol for Pay As You Earn (PAYE), and report your payroll – even if you’re the only employee. HMRC uses the PAYE system to collect employees’ Income Tax and NICs directly from their employers each payday. You also need to register as an employer.

You can operate PAYE using in-house payroll software, or an external provider, such as a bureau or accountant. After registering, use your payroll system to record your salary, calculate deductions, and report both to HMRC on or before each payday.

Paying yourself dividends

Dividends are an effective way to pay yourself from your company’s profit. For each dividend payment, you need to:

• Hold a board meeting to assess your company’s reserves – for example, to ensure there is enough to meet working capital requirements and other liabilities such as interest payments, alongside dividends
• Create a dividend declaration
• Record it in the company’s minutes

How dividends are taxed

Dividend income is not subject to Income Tax or NICs, and you don’t pay it through PAYE. Instead:

• Dividends are distributed from company profits after Corporation Tax
• You pay Dividend Tax rates, which are lower than Income Tax rates
• Pay dividend tax through your Self Assessment return and report it on the return, or by telling HMRC directly, depending on your income level

You don’t pay tax on dividend income that falls within your PA. There is also a dividend allowance (£500 for 2025/26) up to which dividends are tax-free. So, you could earn the PA plus your dividend allowance (£13,070) tax-free if you don’t have other income sources.

Any dividends above that total are taxed at different rates depending on your tax band (see table above). The dividend tax rates are:

• Basic rate – 8.75%
• Higher rate – 33.75%
• Additional rate – 39.35%

The lower rates mean taking profits via dividends is often more tax efficient for directors, but it requires you to be making a profit and the admin and paperwork take time to complete.

Can you pay yourself with business expenses?

Claiming business expenses isn’t the same as paying yourself income. But it does reduce your Corporation Tax bill, so can impact your take-home pay significantly. Legitimate costs include travel, office supplies, professional subscriptions, phones, computing, and use of home for business. Salary (but not dividends), pension contributions, and qualifying benefits for you and your staff are also deductible.

Keep receipts and record reimbursements accurately through your bookkeeping or payroll system.

Salary or dividends: Which is more tax efficient for you?

A salary-first approach often suits directors who want consistent monthly income for budgeting stability, need to show regular income to apply for a mortgage or loan, or plan significant reinvestment of profits.

Directors who prefer to maximise personal income may lean more towards a dividend-led approach.

Helen Wood, Technical Content Writer at TaxAssist, says: “Dividends are usually a key part of a director shareholder’s remuneration strategy. But not always. For example, if a new company is pre-profit it can’t pay dividends – you’d typically need a salary to get by. Or if your company has a complex share structure with multiple shareholders, dividend payments to all may not be practical or possible.”

How do I calculate my salary?

Your exact salary and dividend combination may differ each year, as tax rates and thresholds change – keep a close eye on any budget announcements. It also depends on your personal situation. For example, if you don’t need to accrue more State Pension years or if you’ve already used up your PA with other income sources, you might not need a salary.

For directors who want to maximise income and accrue State Pension benefits, a common strategy is to pay yourself a small salary up to the PA, then take the rest of your income as dividends, depending on available profits. This enables you to avoid NICs as they don’t apply to dividends and pay lower dividend tax rates.

However, Wood warns this approach doesn’t apply to all directors – it still depends on a wide range of other factors. “For example, a single director company with no other employees may not want the admin burden of running payroll and a PAYE scheme,” she says.

Cheryl Sharp, CEO of Pink Pig Financials, gives the example of a company generating £150,000 in annual profit before the owner’s salary. That individual would have a higher personal take-home from dividends (£79,961 for the 2025/26 year) compared with salary (£68,558). However, the salary route would leave more retained profit for reinvestment (£28,958 versus £16,496).

“This shows how your choice depends on your goals,” says Sharp. “If you want cash in hand now, dividends win. If you’re focused on building business reserves, salary may be preferable.”

Do I need an accountant to plan my remuneration?

There are many potential pitfalls when paying yourself through a limited company, including:

• Paying dividends without enough profit to cover them. If you do this, it could be treated as a director’s loan that must be repaid or attract additional tax.
• Failing to document dividend payments properly, which can cause issues in HMRC reviews.
• Not paying NIC at the right thresholds, which can cause you to pay more than necessary or miss benefits such as State Pension qualifying years.

We recommend using an accountant, especially as you reach certain income levels. Sharp says: “When your company generates regular profits over £30,000, or if you expect to take multiple dividends in the year, it’s usually time to bring in professional support.”

In addition to advising on the most efficient remuneration plan, and accountant can help with filings, documentation, compliance, software, and administration.

Salary, dividends and expenses: Key differences