Most limited company directors pay themselves through a mix of a modest salary and dividends. Salary is a business expense that runs through payroll; dividends are paid out of profits left after corporation tax, and each is taxed differently.
Getting the mix right is less about finding a magic number and more about understanding how the two routes work, what paperwork each needs, and how the rates for the current tax year apply to you. This guide explains the mechanics in plain English so you can have a better conversation with your accountant.
Key takeaways
- Salary reduces the company's taxable profit; dividends do not.
- Salary can attract employee and employer National Insurance; dividends do not.
- Dividends can only be paid from retained profits and must be properly declared.
- The best mix changes when thresholds and rates change, so review it each tax year.
- Money taken without salary or dividend paperwork usually lands in your director's loan account.
Salary and dividends defined
A director's salary is pay for your work as an officer of the company. It is processed through PAYE, reported to HMRC through payroll, and deducted as a cost when working out corporation tax.
A dividend is a share of the company's profits paid to shareholders. It is not a cost of the business, so it comes from profit that has already been subject to corporation tax. GOV.UK summarises the options on taking money out of a limited company, and the personal tax treatment is on GOV.UK's tax on dividends page.
Salary vs dividends compared
| Feature | Salary | Dividends |
|---|---|---|
| Corporation tax | Deductible expense | Paid from profit after corporation tax |
| National Insurance | Employee and employer NIC above the thresholds | None |
| Personal tax | Income tax through PAYE | Dividend tax, usually through Self Assessment |
| Can be paid when the company makes a loss? | Yes | No — needs retained profits |
| State Pension record | Can count if paid at a qualifying level | Does not count |
| Paperwork | Payroll submissions and payslips | Board minutes and dividend vouchers |
Setting the salary
Many directors set their salary around the National Insurance thresholds, so it builds a State Pension record and uses some of their Personal Allowance while keeping National Insurance low. Exactly where that point sits depends on the thresholds for the tax year, whether the company can claim Employment Allowance, and whether you have other employment income. These figures change, so check the current rates on GOV.UK rather than copying last year's salary.
A salary should also be justifiable for the work you do, and it must go through a proper payroll with submissions to HMRC on or before each payday.
Paying dividends properly
Before any dividend, check the company has enough distributable reserves— accumulated profits after tax, less losses and earlier dividends. The directors then declare the dividend, recorded in board minutes, and the company issues a voucher showing the date, the shareholder and the amount. Leave enough in the company for its corporation tax bill; our guide to corporation tax marginal relief explains how that bill is worked out.
How your other income changes the answer
Salary and dividends are taxed on top of any other income you have, so the same company can suit a different mix for different directors. If you also have a job elsewhere, your Personal Allowance may already be used by that salary, which changes how much tax your company salary and dividends attract. Rental income, pensions and savings interest all count towards your total too, and they can push dividends into a higher band.
Where a company has more than one shareholder, such as a couple who both own shares, dividends must follow the shareholdings and the company's articles. Arrangements designed purely to shift income between people can be challenged by HMRC, so share structures should reflect the real ownership of the business and be set up with advice. The simplest rule is to review everyone's full income picture before the tax year starts, not after it ends.
Step by step: a yearly pay plan
- Before 6 April, set this year's salary using the current thresholds and run it through payroll.
- Each month, keep bookkeeping up to date so you know the real profit.
- Each quarter, review profits and corporation tax due, then decide whether a dividend is affordable.
- For each dividend, hold a board decision, write minutes and issue vouchers.
- Track your total income across salary, dividends and anything else, so you know which tax band you are in.
- After the tax year, report dividends on your Self Assessment return and set money aside for the tax.
Worked example (illustrative example)
"Kestrel Design Ltd", an invented illustrative example, is owned and run by one director with no other staff. The director has no other income. At the start of the tax year the accountant sets a monthly salary around the National Insurance thresholds, and payroll runs it every month.
By December, management accounts show healthy profits. After setting aside an estimate for corporation tax, the director declares an interim dividend, records it in minutes and issues a voucher. A second dividend follows after the year-end accounts confirm the reserves. Earlier in the year the director had also transferred money for a personal purchase without paperwork; that sum sits in the director's loan account until it is repaid or covered by a later dividend. The company and figures are invented; your own mix depends on your circumstances and the current rates.
Common mistakes
- Taking "dividends" without profits. This can create an unlawful dividend.
- No minutes or vouchers. Without paperwork, HMRC may treat payments differently.
- Forgetting personal tax on dividends. Save for the Self Assessment bill.
- Reusing last year's salary. Thresholds and rates change.
- Treating the company account as your own. Undocumented withdrawals go to the director's loan account.
Plan your pay with us
Our limited company packages start from £75 per month and include director payroll, dividend paperwork and year-end accounts. If you employ staff too, our payroll service starts from £25 per month per employee — and our guide to Employment Allowance explains when a small company can claim it.
Want a salary and dividend plan for this tax year? Contact us or see our pricing.
Frequently Asked Questions
Is it better to take salary or dividends from a limited company?
For many owner-managed companies, a combination works best: a modest salary through payroll plus dividends from profits after corporation tax. Salary is a business expense but can attract National Insurance; dividends carry no National Insurance but are paid from taxed profits. The right balance depends on your profits, other income and the current rates.
Can I pay myself dividends whenever I like?
Only if the company has enough retained profits, after corporation tax, to cover them. Dividends must be formally declared, usually with board minutes, and each payment should come with a dividend voucher. Taking money labelled as dividends when there are not enough profits can create an unlawful dividend that may have to be repaid.
Why do directors often take a small salary?
A salary at a suitable level can give you a qualifying year towards your State Pension, is deductible for corporation tax, and uses some of your Personal Allowance. Setting it depends on National Insurance thresholds that change from year to year, so check the current figures on GOV.UK or ask your accountant before the tax year starts.
Do I pay tax on dividends from my own company?
Yes, if your dividends exceed the dividend allowance and your Personal Allowance is used up. Dividend tax rates depend on which income tax band the dividends fall into. You usually report dividends on your Self Assessment return. Rates and the allowance have changed several times, so check the current figures on GOV.UK.
Can I claim Employment Allowance if I am the only director on payroll?
Generally no. Companies where the only employee paid above the secondary National Insurance threshold is a director cannot claim Employment Allowance. If you employ other staff the position may be different. Our guide to Employment Allowance eligibility explains the rules and when a small company can claim.
Related reading
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Schedule a consultation →Written by the Berber Accounts & Tax team, 124 City Road, London EC1V 2NX, United Kingdom.
Last reviewed: 23 September 2026.
This article is general information, not personal tax advice. Speak to a qualified accountant about your own circumstances before acting on it.