How to pay yourself as a limited company director UK (2026)

Salary vs dividends, why the split matters

As a limited company director, your company is a separate legal entity. It pays Corporation Tax on its profits. You then extract money from the company either as a salary (processed through payroll, subject to Income Tax and National Insurance) or as dividends (distributions of post-tax profit, taxed at lower dividend rates).

The key insight: National Insurance does not apply to dividends. A sole trader earning £50,000 pays Class 4 NIC on most of that. A director taking the same £50,000 via an optimal salary/dividend split pays significantly less, because the dividend portion avoids NIC entirely.

The optimal director salary for 2026/27

For 2026/27, most accountants recommend setting your director salary at £12,570, exactly equal to the Personal Allowance. Here is why:

A salary of £12,570 is below the National Insurance Secondary threshold of £5,000 (employer NIC) but above the Primary threshold of £12,570 (employee NIC), meaning no Income Tax and no employee National Insurance on the salary itself. At this level, the salary is also a deductible expense for your company, reducing its Corporation Tax liability.

If you are the only director-employee, the salary does need to go through payroll, you must operate a PAYE scheme, even if there is nothing to pay. HMRC requires this.

How much can you take in dividends?

After paying yourself a £12,570 salary, you have used your Personal Allowance. Any additional income, in this case dividends, is taxable. The dividend allowance for 2026/27 is £500 (reduced from £2,000 in 2022/23 following successive cuts).

Above the £500 dividend allowance, dividend tax rates apply:

Compare these to Income Tax rates (20%, 40%, 45%) and the saving is clear, especially in the basic rate band where 8.75% dividend tax vs 20% Income Tax is a meaningful difference once NIC is factored in.

A worked example: extracting £50,000 in 2026/27

Suppose your company has made sufficient profit to pay you £50,000 total this year.

Structure: £12,570 salary + £37,430 dividends.

Salary: no Income Tax (within Personal Allowance), no employee NIC (at threshold), no employer NIC (below secondary threshold). Corporation Tax saving on the salary expense: approximately £2,388 at 19% CT rate.

Dividends: first £500 tax-free (dividend allowance). Remaining £36,930 taxed at 8.75% basic rate = approximately £3,231 dividend tax.

Total personal tax: approximately £3,231. A sole trader earning the same £50,000 would typically pay around £11,000–£13,000 in Income Tax and NIC combined. The Ltd company structure saves roughly £7,000–£10,000 per year at this income level.

The compliance requirements you cannot skip

Payroll: You must register as an employer with HMRC and run a PAYE scheme for the director salary. This means filing Real Time Information (RTI) submissions to HMRC every time you pay yourself, even if the payment is below the tax and NIC thresholds.

Dividend vouchers: Every dividend payment must be supported by a formal dividend voucher and a board minute declaring the dividend. These are legal documents, not optional. Without them, HMRC can reclassify dividends as salary and apply PAYE retrospectively.

Sufficient distributable reserves: You can only pay dividends out of post-tax profits. Paying a dividend when there are insufficient retained profits is an illegal distribution under the Companies Act 2006.

Self Assessment: As a director receiving dividends, you must file a Self Assessment tax return each year, even if you owe little or no additional tax. The deadline is 31 January following the end of the tax year.

What about pension contributions?

Employer pension contributions made by your company are a fully deductible Corporation Tax expense and do not count as a benefit in kind. They are one of the most tax-efficient ways to extract additional value from your company beyond the salary/dividend split, particularly if you are approaching the higher rate threshold.