How to pay yourself from a limited company

Setting up a limited company is an exciting step, but it changes how you take money out of your business. Unlike a sole trader, you can’t just withdraw funds — you need to formally pay yourself through official channels. 

So now you’re wondering: how do I pay myself as a limited company owner?

You’ve got several options: take a salary via payroll, pay yourself dividends from company profits, or combine the two (which is usually the most tax-efficient approach). You can also make pension contributions, take a director’s loan, or claim reimbursed expenses.

In this guide, we’ll show you how to pay yourself from a limited company, explaining each method and the tax implications so you can determine the best approach for your business. 

And remember: this is just a starting point. Be sure to seek professional accounting advice before you make any decisions.

Paying yourself from a limited company: director’s salary

One option is to pay yourself a director’s salary. This means you’re employed by your own company as a director and receive a regular salary through PAYE (Pay As You Earn). 

To pay yourself a director’s salary, you must:

• Register as an employer with HMRC 

• Run payroll (either in-house using payroll software, or through an accountant or specialist payroll provider)

• Deduct Income Tax and National Insurance Contributions (NICs) before paying yourself

• Report all salary payments to HMRC in real-time, compliant with RTI (Real Time Information) rules 

This offers several benefits, especially if you take a lower salary (more on that shortly).

First, it reduces your Corporation Tax bill. A salary counts as an allowable business expense, so it’s deducted from your company’s profits before tax is calculated. 

Second, it builds your National Insurance record. If you pay yourself a director’s salary that’s above the Lower Earnings Limit (£6,500 for the 2025/26 tax year), you’ll accrue National Insurance credits which count towards your state pension and benefits. 

Of course, the higher your director’s salary, the more Income Tax and NI you’ll pay — both personally and as a company. So, if you want to keep things as tax-efficient as possible, you’ve got to be strategic about how much you pay yourself. 

With that, let’s take a look at how much Income Tax and National Insurance you can expect to pay on a director’s salary.

What Income Tax and National Insurance do you pay on a director’s salary?

Here’s how Income Tax and NI stack up across various salary bands for the 2025/26 tax year:

1. A director’s salary of £5,000 per year

This is below the Lower Earnings Limit (LEL) of £6,500 so you won’t pay any Income Tax or employee National Insurance Contributions (NICs). Because it’s below the LEL, note that you won’t qualify for NI credits, meaning this income won’t count towards your State Pension.

At this salary level, you’re also exempt from Employer NICs (these only apply to earnings above £5,000). 

2. A director’s salary of £6,500 per year

This sits right at the Lower Earnings Limit, so you’re still not required to pay any Income Tax or employee National Insurance Contributions. However, you’ll now qualify for NI credits, which means you’ll continue to build towards your State Pension. 

On this salary, the company will pay Employer NICs at a rate of 15% on the amount above the £5,000 threshold (i.e. £1,500). 

3. A director’s salary of £12,570 per year

This is equal to your tax-free personal allowance, so you won’t pay any Income Tax unless you have additional income (such as dividends — we’ll explore how that works later on). Nor will you pay any employee NICs. 

The company will pay Employer NICs at a rate of 15% on the portion of your salary that sits between £5,000 and £12,570 (i.e. £7,570). 

And what if your director’s salary exceeds £12,570 per year? Then both you and your company will start paying National Insurance contributions, as follows:

• As an employee, you’ll pay 8% on all earnings between £12,570 and the Upper Earnings Limit (UEL) of £50,270 per year, and 2% on anything above the UEL 

• As an employer, you’ll pay 15% on all earnings above the secondary threshold (which is £5,000 per year for 2025/2026)

This is why many directors keep their salary somewhere between £6,500 and £12,570. That’s the sweet spot for tax efficiency: you get National Insurance credits without paying NI contributions or Income Tax, while still reducing your company’s Corporation Tax bill through allowable salary expenses. 

How to pay yourself from a limited company: dividends 

Another option when considering how to pay yourself from a limited company is dividends.

A dividend is a payment made to shareholders (including you, the director) based on what’s left of the company’s profits after you’ve paid Corporation Tax. 

Note that you can only pay dividends if your company has sufficient post-tax profits. Dividends must come out of money the business has already earned and taxed — not from its operating funds or reserves. 

If you take dividends when there aren’t enough retained profits, that’s considered an illegal dividend and you may have to pay it back. 

To pay yourself a dividend, you must: 

• Hold a board meeting and record the decision in meeting minutes (even if you’re the only director)

• Issue a dividend voucher stating the date, company name, shareholder’s name, and amount paid

• Transfer the money from your business account to your personal account 

Bear in mind that dividends don’t count as a business expense so they won’t reduce your Corporation Tax bill. However, they’re generally taxed at a lower rate than your director’s salary. Another bonus: they’re not subject to National Insurance deductions. 

What tax do you pay on dividends?

Dividends are subject to their own tax rates, separate from Income Tax, and this is where it can get a bit confusing. 

What’s important to note is that your salary and dividends are added together to determine which tax band you fall into. 

So: bear in mind you have a tax-free Personal Allowance of £12,570, then a £500 dividend allowance on top of that. Once you exceed those allowances, your dividends are taxed as follows: 

• Basic rate band (total income up to £50,270): 8.75% 

• Higher rate band (total income between £50,271 and £125,140): 33.75% 

• Additional rate (total income over £125,140): 39.35%

Let’s say you take a director’s salary of £12,570 and pay yourself £30,000 in dividends. Here’s how the calculations would play out:

• Your salary uses up your Personal Allowance, so there’s no Income Tax on it in this scenario

• £500 of your dividend income is tax-free (dividend allowance)

• The remaining £29,500 of dividends is taxed at 8.75%, because your total income (£12,570 + £30,000 = £42,570) keeps you within the basic rate band

So you’d pay £29,500 × 8.75% = £2,581.25 in dividend tax. That’s significantly less tax than you’d pay if you took the same amount as a salary, which is why many directors go for a combination. 

How to pay yourself from a limited company with a salary and dividends

For most small company directors, the most tax-efficient approach is to take a combination of salary and dividends. This keeps you legally compliant, reduces your tax liability, and maximises your take-home pay. 

Here’s how to pay yourself from a limited company with a salary and dividends together:

1. Pay yourself a modest director’s salary: You might set your salary around the Employer NI threshold (£9,100) or up to your personal allowance (£12,570) to avoid Income Tax and limit National Insurance contributions while still building NI credits.

2. Take the remainder as dividends: Dividends are paid from post-tax profits, so the amount you can take will depend on your company’s profitability. Adjust your dividend portion based on your total income so you don’t push yourself into a higher tax band.

3. Stay compliant and calculate a split that works for you: Consider any other income, pension contributions, or planned expenses when deciding your salary and dividend split, and ensure your company has enough post-tax profits to cover dividends. 

Director’s pension contributions 

Another way to make the most of your limited company’s profits is to contribute to a pension. 

Pension contributions made by your company on your behalf count as a business expense, and they’re not subject to National Insurance. So, if you use them strategically alongside your salary and dividends, you can reduce your tax liability and maximise your take-home pay. 

Note that the annual allowance for tax-free contributions is £60,000 across all pension schemes for the 2025/26 tax year. 

Here’s how it works:

• Set up a pension scheme in your name through your company; many providers offer director-friendly options

• Decide on the contribution amount with your accountant or financial adviser to ensure it’s within allowances and tax-efficient

• Pay contributions directly from the company account — there’s no need to route them through your personal account first. If you’ve not yet got a business account set up, you can open a limited company bank account for free

Even modest contributions can boost long-term retirement savings while simultaneously reducing your company’s Corporation Tax, making it a smart part of your overall remuneration strategy.

Other ways to make the most of your money within a limited company

Beyond salary, dividends, and pension contributions, there are other ways to make the most of your limited company’s profits while staying tax-efficient. Two key areas worth understanding are Director’s Loans and company benefits and expenses. 

Director’s Loans

A Director’s Loan is money you take from your company that isn’t classed as salary, dividends, or a pension contribution. Essentially, it’s when you borrow money from your company or lend money to it. 

This can be useful for managing short-term cash flow or getting temporary access to company funds, but you must keep track of what’s going in and out.

All director loans are tracked in a Director’s Loan Account (DLA). If you leave your DLA overdrawn, you may face extra tax implications, as follows:

• If the loan isn’t repaid within nine months of the company’s year-end, the company must pay an additional Corporation Tax charge (known as a Section 455 tax) at 33.75% of the outstanding amount. This can be reclaimed later once the loan is repaid

• If the loan exceeds £10,000, it may also count as a benefit in kind, meaning you’ll pay Income Tax on the benefit and the company may owe Class 1A National Insurance

Benefits and expenses 

Certain benefits and expenses can also be paid through your company in a tax-efficient way. Examples include some types of insurance, mobile phone costs, or professional subscriptions. Paying for these through your company can reduce your personal tax burden and form part of an overall remuneration package.

Note that all benefits in kind must be declared annually via a P11D form. For more information, check out our guides explaining benefits in kind and tax-deductible business expenses.

Wrapping up

Paying yourself from a limited company doesn’t have to be complicated. The most common and tax-efficient approach for small company directors is usually a combination of salary and dividends: a modest salary reduces Corporation Tax and builds National Insurance credits, while dividends attract lower tax and no National Insurance.

In addition, you can make the most of your company’s profits through pension contributions, director’s loans, and company benefits and expenses.

The key is to plan strategically and stay compliant. With the right balance of salary, dividends, pensions, and other company-funded benefits, you can minimise tax and maximise your take-home pay. 

Ready to set up your limited company? Register your company with us for just £14.99 (instead of the £50 it’ll cost you via Companies House) and get all the tools you need to manage your money with our smart, secure accounting software. 

Still undecided about the best setup for your business? Learn more about what it means to be a limited company, and weigh up the pros and cons of being a sole trader vs a limited company. 

Photo by Tyler Franta on Unsplash