Salary and dividend planner: how to pay yourself from your limited company

Think of every pound of profit as having two possible journeys out of the company.

The salary route

A salary is a deductible cost. Pay yourself £1,000 of salary and the company’s taxable profit falls by £1,000, plus the employer National Insurance on top. Against that, the company pays employer National Insurance at 15 per cent on pay above the secondary threshold, you pay employee National Insurance at 8 per cent on pay above the primary threshold, and the whole amount is taxed at your income tax rate. Salary also needs a payroll scheme, real time submissions on or before each payment, and auto-enrolment handled.

The dividend route

A dividend is not a company cost. The profit it comes from has already carried corporation tax at 19 per cent, 25 per cent, or somewhere between the two under marginal relief. What is left is taxed on you at dividend rates, which sit below the equivalent income tax rates, and no National Insurance applies at either end.

So the planner is weighing one tax charge the company avoids against another it has already paid. For most owner managed companies the answer lands on a modest salary plus dividends, because the first slice of salary soaks up the personal allowance and costs the company very little, while the rest comes out at dividend rates with no National Insurance. The useful question is not which route is better in the abstract, but where your own break point sits once corporation tax, your other income, and anything you want the company to pay into a pension are in the same calculation.

These are the figures that set the shape of the answer for England, Wales and Northern Ireland in the 2026/27 tax year, correct as at October 2026. Scottish income tax bands differ for non-dividend income, though dividend rates are UK-wide.

Two of those moved recently and are worth noticing. The ordinary and upper dividend rates each went up by two percentage points from April 2026, which narrows the gap between taking a dividend and taking salary. The dividend allowance has been £500 since 2024/25, so for most directors it now covers a rounding error rather than a meaningful slice of income.

Always check current figures on gov.uk before you commit to a plan, and run the arithmetic on your own numbers with our salary and dividends calculator.

Most directors set salary at one of two points: the primary threshold of £12,570, which uses the personal allowance in full and avoids employee National Insurance, or the secondary threshold of £5,000, which avoids employer National Insurance as well. The gap between them is the bit worth thinking about.

Where the employment allowance changes the answer

The employment allowance knocks £10,500 off a company’s employer National Insurance bill, but a company whose only employee is a single director cannot claim it. Add a second person to the payroll on a genuine wage for genuine work and the allowance comes back into reach, which usually makes the higher salary the better of the two settings because the employer National Insurance on it is covered.

This is the single most common thing I find when I look at a professional services company for the first time. One director, one payroll record, the allowance sitting unclaimed year after year. Check your own position with the employment allowance checker and the HMRC guidance.

Putting a spouse on the payroll

Employing a spouse or family member can work, and it can bring the employment allowance within reach, but the role has to be real and the pay has to be defensible for the work actually done. HMRC can disallow pay that fails that test. Keep a short written record of the duties and the hours.

Keeping the state pension year

A salary at or above the lower earnings limit gives a qualifying year for the state pension even where no National Insurance is actually paid. If you set salary below that line, you give that up, and over a long run of years it adds up.

A dividend is only legal if the company has distributable profit to cover it: accumulated profit after corporation tax, from this year and prior years, less dividends already paid. Cash in the bank is not the test. A company can be sitting on money that belongs to a VAT or corporation tax bill and have nothing available to distribute.

The paperwork HMRC expects

• Hold a directors’ meeting to declare the dividend and minute it, even if you are the only director.
• Write a voucher for each payment showing the date, the company name, the shareholder, and the amount.
• Give the shareholder a copy and keep one on file.
• Pay all shareholders of the same class in proportion to their holdings.

None of that takes long. What it buys you is a defensible record if HMRC ever asks when a payment was made and what it was.

When a dividend is not a dividend

Money drawn from the company that is neither salary nor a properly declared dividend sits on your director’s loan account. If the account is overdrawn at the year end and still overdrawn nine months and a day later, the company pays a tax charge on the balance, refundable once the loan is cleared. An overdrawn balance above £10,000 at any point in the year also creates a taxable benefit unless the company charges interest at the official rate.

A dividend paid without profit behind it can be challenged and treated as a loan or as earnings instead, which brings National Insurance with it. The fix is dull and effective: look at up to date management figures before you declare. HMRC’s own summary of the rules is on gov.uk.

The standard low salary plus dividends answer holds for a lot of directors. These are the situations where it stops holding, and where running a proper salary and dividend planner each year earns its keep.

Income approaching £100,000

The personal allowance is withdrawn at £1 for every £2 of income above £100,000, so the band just above it carries a much higher effective rate than the headline higher rate suggests. Deferring a dividend into the next tax year, or routing the money into an employer pension contribution instead, often lands better. Free childcare and tax free childcare also cut out at an income level, which can matter more than the tax.

Child benefit in the household

The high income child benefit charge claws back child benefit once the higher earner’s adjusted net income passes the threshold. Dividend timing and pension contributions both feed into that figure.

A mortgage or lending application

Lenders read salary and dividends from your tax calculations and your accounts. A plan that minimises tax in the year you apply can cost you borrowing capacity. If a purchase or remortgage is coming, say so before the year end rather than after.

A student loan still running

Repayments are taken on dividend income once total unearned income passes £2,000 in the year, at which point the whole of it counts. That tilts the arithmetic back towards salary for some directors.

Other shareholders and other income

Dividends go to everyone holding that class of share. Where a spouse holds shares, the family tax position and the settlements rules both need looking at. Rental profit, savings interest, or a second employment all change which band your dividends fall into.

Timing is one of the few levers that costs nothing to pull.

The date a dividend counts

A dividend falls into the tax year it is paid, or for a final dividend, the date it is approved. Declaring on 2 April rather than 10 April moves the income into a different year and can mean the difference between it sitting in the basic rate band and crossing into the higher. If your company’s year end does not line up with 5 April, you need both dates in your head.

The January bill

Tax on dividends is paid through self assessment, so the money leaves your personal account long after it arrives. Once your bill passes the payments on account threshold, you also start paying instalments towards the following year, which means a first large dividend year can produce a January payment that feels like a year and a half of tax at once. Put the money aside as the dividends are paid.

What the return now asks directors

Self assessment returns ask directors of close companies for more detail than they used to, including dividends received from their own company shown separately from other dividend income, and the percentage of shares held. Sloppy records make that harder than it needs to be. Minutes and vouchers filed as you go turn it into a five minute job.

Keep the payroll side tidy as well: real time submissions on or before each payment date, and auto-enrolment assessed properly if anyone other than a sole director is on the payroll.