Can I just pay myself a large salary instead of dividends?

You can, but it’s usually less tax-efficient. Salary above the personal allowance (£12,570) attracts income tax at 20%+ AND employee NI at 8%, plus the company pays 15% employer NI. Dividends above the same threshold attract only dividend tax (10.75% basic rate) with no NI on either side. For most directors, a low salary plus dividends results in significantly more take-home pay.

How often should I pay myself dividends?

There’s no fixed requirement. Some directors pay monthly, others quarterly, others annually. The company must have sufficient distributable profits at the time each dividend is declared. Most accountants recommend quarterly or as needed, documented with proper board minutes and dividend vouchers.

Do pension contributions count against my annual allowance if my salary is low?

Employer pension contributions are not limited by your earnings — they’re limited by the annual allowance (£60,000) and must pass the “wholly and exclusively” test. This is a key advantage: even if your salary is just £12,570, your company can contribute up to £60,000 to your pension.

What happens if my company doesn’t make a profit this year?

You cannot pay dividends from a loss-making company (no distributable profits). You can still pay yourself a salary, which becomes a business expense and increases the loss. You could also draw a director’s loan, but this must be repaid and may trigger section 455 tax if not cleared in time.

Is it legal to pay a low salary and top up with dividends?

Yes. This is the standard, legitimate approach used by the vast majority of single-director limited companies in the UK. HMRC publishes the exact thresholds and rates precisely so directors can plan their pay structure. It is how the system is designed to work.

Should I pay myself differently if my company profits vary year to year?

Yes — this is where pension contributions become especially useful. In high-profit years, you can make larger pension contributions (up to £60,000, plus unused allowance from the previous 3 years via carry forward). In low-profit years, stick to salary and modest dividends. The flexibility of dividends (no fixed schedule) also helps with variable profits.

Do I need an accountant to do all this?

It’s strongly recommended. While this guide explains the principles, an accountant handles the practical implementation — PAYE registration, RTI submissions, dividend documentation, corporation tax returns, and pension contribution structuring. The cost of an accountant (typically £1,000–£2,500/year for a single-director company) is itself a deductible business expense and usually saves more than it costs.

Where do the figures in this guide come from?

All tax rates, thresholds, and allowances are sourced directly from HMRC published guidance for the 2026/27 tax year. Source links are provided at the bottom of this page. The calculations are generated by the same engine that powers our salary vs dividend calculator, verified against HMRC figures.

How to Pay Yourself from a Limited Company

The complete guide to director remuneration for 2026/27 — salary, dividends, pensions, and more.

2026/27 tax yearUpdated March 2026

Key takeaways

Most directors pay themselves through a combination of salary and dividends — this is the standard, legal approach.
A small salary (typically £12,570) plus dividends is usually the most tax-efficient split for single-director companies.
Pension contributions from your company are a powerful third option — often more tax-efficient than dividends at higher profit levels.
Director's loans are NOT a way to pay yourself — they must be repaid or you face a 33.75%+ tax charge.
The right mix depends on your profit level, personal circumstances, and long-term goals — use our calculator to model your numbers.

When you set up a limited company, there is a fundamental concept that changes everything about how you get paid: your company is a separate legal person from you. The money sitting in its bank account is not your money. It belongs to the company.

This is not a burden — it is the mechanism that makes limited companies tax-efficient. Because the company is a separate entity, you have several different channels to move money from the company to yourself, each with different tax treatment. Choosing the right combination is how directors legally minimise their tax bill.

This guide covers all five ways directors take money from their company, explains the mechanics behind each, and shows how they interact. It covers the 2026/27 tax year (6 April 2026 to 5 April 2027).

What changed for 2026/27

Dividend tax rates increased by 0.75 percentage points from April 2026 (basic rate now 10.75%, higher rate now 35.75%). The personal allowance and NI thresholds remain frozen. For a full breakdown, see our tax year changes guide for directors.

Not financial advice

This guide explains the general principles for illustrative purposes. It is not financial advice. Always discuss your specific circumstances with a qualified accountant.

Overview

Five ways directors take money from their company

Before diving into detail, here is the complete picture. Most directors use a combination of the first two or three methods.

Method 1

Salary (via PAYE)

A monthly or annual payment through your company's payroll. Exactly like being employed, except you decide the amount. Most directors set this at a tax-efficient level.

Tax treatment: Subject to income tax + National Insurance. Deductible for corporation tax.

Used by almost all directors

Method 2

Dividends

A distribution of the company's after-tax profits. Lower tax rates than salary and no National Insurance. The main way most directors top up their income.

Tax treatment: Subject to dividend tax (lower rates than income tax). No NI. Must come from profits.

Used by almost all directors

Method 3

Employer Pension Contributions

Your company pays directly into your personal pension. No income tax, no NI, and the company gets corporation tax relief. The trade-off: money is locked until age 55 (57 from 2028).

Tax treatment: No income tax, no NI, corporation tax deductible. Locked until retirement.

Common among established directors

Method 4

Director's Loan Account

Borrowing from the company. This is NOT income — it is a loan that must be repaid. Used for short-term cash flow, not as a pay strategy. Punitive tax charges apply if not repaid on time.

Tax treatment: Not income. Must be repaid. Section 455 tax charge if outstanding too long.

Common but often misunderstood

Method 5

Benefits in Kind

Company-provided benefits like a mobile phone, health insurance, or trivial gifts. Some are tax-free; others create a taxable benefit. Useful extras but not a major part of most directors' pay packages.

Tax treatment: Varies by benefit. Some tax-free, others taxable via P11D.

Minor but worth knowing about

Method 1

Salary: the foundation of your pay package

How it works

As a director, you register your company for PAYE and put yourself on the payroll. You pay yourself a salary just like any employer pays an employee. The company must submit Real Time Information (RTI) reports to HMRC each time you're paid, even if the amount is below the tax threshold.

Why take a salary at all?

Even though dividends are taxed at lower rates, there are compelling reasons to take at least some salary:

State pension qualification: A salary above the Lower Earnings Limit (£6,396) gives you a qualifying year for state pension without actually paying NI.
Corporation tax deduction: Salary is an allowable business expense, reducing your company's taxable profit and corporation tax bill.
Personal income evidence: Mortgage lenders and credit checks often prefer salary income over dividends.

The key thresholds

Three salary levels matter for directors. The employer NI secondary threshold is £5,000 — below this, no employer NI is due. The NI Lower Earnings Limit is £6,396 — above this, the year counts toward your state pension. The personal allowance is £12,570 — salary up to this amount attracts no income tax and no employee NI.

The most tax-efficient salary for 2026/27

For most single-director companies, the optimal salary is £12,570. At this level, you pay no income tax and no employee NI. The company pays 15% employer NI on the salary above £5,000, but the corporation tax saving on the salary deduction more than offsets this cost.

For the detailed comparison of £5,000 vs £12,570, with worked arithmetic at different profit levels, see our optimal director's salary guide.

Practical requirements

Even if your salary is below the tax threshold, you must register for PAYE, run payroll (most accounting software handles this), and submit RTI reports to HMRC. Missing RTI submissions can result in penalties.

Method 2

Dividends: the tax-efficient top-up

How dividends work

After your company pays corporation tax on its profits, the remaining money is available as distributable profits. The board (which may just be you) can declare a dividend to distribute some or all of these profits to shareholders. Dividends are not a business expense — they are a distribution of what is left after expenses and tax.

Why dividends are tax-efficient

Two reasons make dividends the preferred way for directors to extract most of their income:

No National Insurance. Neither the company nor you pay NI on dividends. For salary, you would pay 8% employee NI and the company would pay 15% employer NI on amounts above the thresholds.
Lower tax rates. Dividend tax rates are lower than the equivalent income tax bands at every level.

2026/27 dividend tax rates

Band	Rate	Applies to
Dividend allowance	0%	First £500 of dividends
Basic rate	10.75%	Income within the basic rate band
Higher rate	35.75%	Income within the higher rate band
Additional rate	39.35%	Income above the additional rate threshold

How dividend tax is calculated

Your salary uses up your personal allowance first. Then your dividends stack on top. The first £500 of dividends is tax-free (the dividend allowance). After that, your dividends are taxed at the rate matching the income tax band they fall into. If your salary is £12,570 and your total dividends keep you within the basic rate band, you pay just 10.75% on the taxable portion.

The distributable profits rule

You can only pay dividends from accumulated profits after corporation tax. If your company has not earned enough profit, you cannot declare a dividend. If you pay dividends exceeding available profits, they become illegal dividends — treated as a director's loan, which can trigger section 455 tax charges.

Interim vs final dividends

You do not have to wait until the end of the financial year. Interim dividends can be declared at any point during the year, as long as sufficient distributable profits exist at the time. Final dividends are declared after the accounts are prepared. Most single-director companies use a combination of both.

Dividend vouchers

Each dividend payment should be documented with a dividend voucher recording the date, amount, and shareholder. This is a legal requirement. HMRC can challenge undocumented dividend payments. Most accounting software generates these automatically.

See how salary and dividends interact with your specific profit level in our salary vs dividend calculator.

See how this applies to your numbers

The salary and dividend figures depend on your company's profit level. Our calculator runs the full computation — corporation tax, employer NI, dividend tax, and take-home — for your specific numbers.

Open the calculator

Free · No signup required · 2026/27 rates

Method 3

Employer pension contributions: the tax-efficient third option

How it works

Your company contributes directly to your personal pension as an employer contribution. This is not salary — it does not go through PAYE or attract NI. The company simply makes a payment to your pension provider.

Why it's powerful

Employer pension contributions offer a triple tax benefit that makes them the most tax-efficient extraction method in many situations:

Corporation tax deductible — the contribution reduces the company's taxable profit, saving 19% (or 25% for larger companies) of the contribution in corporation tax.
No employer NI — unlike salary, no National Insurance is payable.
No employee NI or income tax — the contribution goes straight into the pension without any personal tax deduction.

For example, a basic-rate taxpayer extracting money as dividends pays corporation tax on the profit and then dividend tax on the distribution. The same money put into a pension avoids the dividend tax entirely and may even reduce the corporation tax bill further.

The annual allowance

The pension annual allowance for 2026/27 is £60,000. This is the maximum that can be contributed across all your pensions in a tax year (employer + personal contributions combined). A key advantage: employer contributions are NOT limited by your salary level. Even if your salary is just £12,570, your company can contribute up to £60,000 to your pension.

Carry forward

If you have unused annual allowance from the previous three tax years, you can carry it forward into the current year. This is particularly powerful for directors with lumpy profit years — a single strong year can fund a much larger pension contribution than the annual limit.

The trade-off: accessibility

Important: Pension money is locked until you reach age 55 (rising to 57 from 6 April 2028). This is not suitable for money you need in the short or medium term. The tax advantages are significant, but only useful if you can afford to lock the money away.

Tapered annual allowance

If your adjusted income exceeds £260,000, the annual allowance begins to taper. This is beyond the scope of most single-director companies and is not covered in detail here. Speak to your accountant if your total income is in this range.

When pension contributions make sense

Higher profit levels (above approximately £50,000) where the tax savings become substantial
Directors aged 40+ who want to build retirement wealth tax-efficiently
Years with unusually high profits where carry forward can be used
When you have already covered your short-term income needs through salary and dividends

Method 4

Director's loan account: borrowing from your company

What it is

When you take money from the company that is not salary or dividends, it is recorded as a loan on the director's loan account (DLA). The company is lending you money. You owe it back. This is a bookkeeping mechanism, not a tax planning tool.

When it's fine

Short-term borrowing is normal — for example, paying a personal bill before dividends are formally declared. As long as the loan is repaid within the same accounting period, there are typically no tax consequences. Many directors have small DLA movements throughout the year that net out by year end.

The section 455 trap

Section 455 tax charge

If a director's loan is still outstanding 9 months and 1 day after the company's year-end, the company must pay a temporary tax charge of 33.75% on the balance (rising to 35.75% for loans made from 6 April 2026). This tax is refunded when you repay the loan, but it creates a significant cash flow hit. For a £10,000 outstanding loan, that is a £3,575 temporary tax charge.

Benefit in kind on larger loans

If the loan balance exceeds £10,000 at any point during the tax year and you are not paying interest at HMRC's official rate (currently 3.75%), a taxable benefit in kind arises. This is reported on form P11D and you pay tax on the deemed interest benefit.

The “bed and breakfasting” anti-avoidance rule

If you repay more than £5,000 of a director's loan and then re-borrow within 30 days, HMRC can disregard the repayment for section 455 purposes. This prevents the tactic of briefly repaying a loan around the year-end to avoid the tax charge.

Bottom line

A director's loan account is a bookkeeping mechanism, not a tax planning tool. Never use it as a way to “pay yourself” — it must always be repaid. If you find yourself routinely borrowing from the company, you likely need to increase your salary or dividends instead.

Method 5

Benefits in kind: the small but useful extras

Tax-free benefits worth knowing about

Trivial benefits: Gifts up to £50 per occasion, with a maximum of 6 per year for directors (£300 total). Must not be cash or a cash voucher.
Mobile phone: One mobile phone per employee is tax-free, provided the contract is in the company's name.
Annual parties: Up to £150 per head including VAT for annual events open to all staff.

Taxable benefits

Private medical insurance, company cars, and gym memberships create a taxable benefit in kind. The company reports these on form P11D (though mandatory payrolling of benefits is being introduced from April 2027, which will change the reporting process). You pay tax on the benefit value at your marginal rate.

Bottom line

Benefits in kind are useful extras but not a significant part of most directors' pay packages. Focus on getting your salary, dividends, and pension contributions right first. The tax-free trivial benefits and mobile phone exemption are worth claiming but are small in the overall picture.

Worked Example

How it all fits together: a typical scenario

A single-director company with £60,000 gross profit, taking salary, dividends, and a pension contribution.

Company gross profit

£60,000

Director's salary (deductible)

−£12,570

Employer NI on salary (deductible)

−£1,136

Employer pension contribution (deductible)

−£5,000

Taxable profit remaining

£41,295

Corporation tax at 19%

−£7,846

Available for dividends

£33,449

Dividend tax (at 10.75% basic rate)

−£3,542

What the director receives

Salary (in hand)

£12,570

Dividends after tax (in hand)

£29,907

Pension contribution (locked until retirement)

£5,000

Total in hand

£42,477

Total including pension

£47,477

This example assumes a single director with no other income, taking a salary at the personal allowance level. The pension contribution is optional — without it, more profit would flow through as dividends. Your figures will differ based on your actual profit level and personal circumstances.

Model your own pay structure

Every company is different. Enter your actual gross profit to see the optimal salary and dividend split — and compare different scenarios.

Try the calculator

Free · No signup required · 2026/27 rates

Watch Out

Common mistakes directors make

Taking dividends without sufficient profits. If your company does not have enough distributable reserves, dividends become illegal and are treated as a director's loan — triggering section 455 tax charges.
Not registering for PAYE. Even a salary of £12,570 requires PAYE registration and RTI submissions to HMRC. Operating without PAYE registration can result in penalties.
Forgetting employer's NI. When budgeting for salary, remember the company must also pay 15% employer NI on salary above £5,000. This is an additional cost on top of the salary itself.
Ignoring pension contributions. Many directors default to salary plus dividends without considering the significant tax advantages of employer pension contributions, especially at higher profit levels.
Treating the company bank account as personal. The company is a separate legal entity. Unrecorded personal withdrawals become director's loans with potential tax consequences. Keep clear records of every transaction.
Not keeping dividend vouchers. Each dividend payment should have a formal voucher documenting the date, amount, and recipient. HMRC can challenge undocumented dividends, potentially reclassifying them as salary (with full NI and income tax liability).

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Common Questions

Frequently asked questions

Sources

All tax rates, thresholds, and allowances in this guide are sourced from HMRC published guidance for the 2026/27 tax year. Last verified March 2026.

[1]

Income Tax rates and bands

Last verified: 2026-03-16

[2]

Personal allowance and band freeze (Autumn Budget 2024)

Last verified: 2026-03-16

[3]

National Insurance thresholds 2026/27

Last verified: 2026-03-16

[4]

National Insurance contribution rates

Last verified: 2026-03-16

[5]

Corporation Tax rates

Last verified: 2026-03-16

[6]

Corporation Tax maintained for FY 2026 (Autumn Budget 2024)

Last verified: 2026-03-16

[7]

Tax on dividends

Last verified: 2026-03-16

[8]

Student loan repayment thresholds 2026/27

Last verified: 2026-03-16

[9]

Running a limited company: taking money out

Last verified: 2026-03-17

[10]

Director's loans

Last verified: 2026-03-17

[11]

Pension annual allowance

Last verified: 2026-03-17

Continue exploring

Salary vs Dividend Calculator

Model your own salary and dividend split with our free calculator. See the exact tax implications for your profit level.

Optimal Director's Salary 2026/27

Should you take £12,570 or £5,000? The detailed analysis with worked arithmetic.

2026/27 Tax Year Changes for Directors

What's changing in April 2026? Dividend tax increase, frozen thresholds, and more.

TidyRules provides estimates for illustrative purposes only and does not constitute financial advice. Always consult a qualified accountant for advice specific to your circumstances. Built and maintained by AI, with calculations verified against HMRC published guidance.