How to pay yourself as a Limited Company director with salary vs dividends explained

Most limited company directors pay themselves a salary of £12,570 per year (£1,047 per month) combined with dividends of up to £37,700 per year.

This keeps total income within the basic rate tax band, results in an estimated tax bill of around £3,999 per year, and produces a net take-home of approximately £46,271.

The exact optimal mix depends on your individual circumstances, so speaking with an accountant is strongly recommended.

One of the first questions new limited company directors ask us at Nava Accountancy is: how do I actually pay myself?

Unlike being a sole trader, where you simply draw money from your business profits, running a limited company means you have a choice of how to take income, and that choice has a significant impact on how much tax you pay. This guide explains the two main methods, salary and dividends, and how combining them is the most tax-efficient approach for most directors in 2026/27.

What does paying yourself a salary as a limited company director mean?

Paying yourself a salary as a director means you receive a regular income from your company, just like an employee.

This salary is subject to income tax and National Insurance contributions but is also a deductible expense for your company, reducing its Corporation Tax bill.

For the 2026/27 tax year, the optimal salary for a director is £12,570 per year, which matches the personal allowance threshold.

This means you pay no personal income tax on this salary if it is your only income. However, you will still have to consider National Insurance contributions and employer costs. Paying yourself a salary ensures you build up qualifying years for the State Pension, which requires a minimum salary of £6,708 per year (the Lower Earnings Limit) to count.

 
Important Disclaimer: This blog post is for general informational purposes only and does not constitute professional financial or tax advice. Tax rules and thresholds can change, and individual circumstances vary. Please consult a qualified accountant or tax advisor before making decisions about your salary, dividends, or company finances.

Getting your salary and dividends mix right can save you thousands of pounds each year, but the best approach depends on your company profits, personal circumstances, and long-term goals. At Nava Accountancy, we review every client’s director pay structure as part of our ongoing service, ensuring it remains tax-efficient as your business grows. Get in touch for a free discovery call and we will work out the optimal figures for your situation.

Frequently Asked Questions

What is the most tax-efficient salary for a limited company director in 2026/27?

The most tax-efficient salary for most directors in 2026/27 is £12,570 per year, which equals £1,047 per month. This matches the personal allowance, meaning no income tax is due on the salary.

Employers’ National Insurance of approximately £1,135 is payable by the company, but the Corporation Tax saving from the salary deduction outweighs this cost in most cases.

It is also worth noting that the Employment Allowance for 2026/27 is £10,500, which can reduce or eliminate the employer NIC bill entirely if your company has more than one employee on the payroll. Sole directors with no other employees cannot claim it, but if you have staff, speak with your accountant about whether you qualify.

How much can I take as dividends before paying tax in 2026/27?

In 2026/27, the dividend allowance is £500, meaning the first £500 of dividend income is tax-free. Above this, dividends are taxed at 10.75 per cent for basic rate taxpayers, 35.75 per cent for higher rate taxpayers, and 39.35 per cent for additional rate taxpayers.

If you take a salary of £12,570 and dividends of up to £37,700, your total income stays within the basic rate band and your estimated tax bill is around £3,999 per year.

Can I pay myself dividends if my company is not making a profit?

No. Dividends can only be paid from post-tax distributable profits. If your company is running at a loss or has no retained profits, you cannot legally declare dividends. Taking money out of a company that has no distributable profits could be reclassified by HMRC as a director’s loan or an unlawful distribution, which carries additional tax charges and potential personal liability.

Do dividends count towards my State Pension?

No, dividends do not count towards your State Pension. Only salary (or other National Insurance contributions) qualifies you for State Pension years. To secure a qualifying year in 2026/27, you need to earn at least £6,708 in salary (the Lower Earnings Limit). This is one of the key reasons why most directors pay themselves at least this amount as salary rather than taking all income as dividends.

Should I pay myself a salary or dividends if my company profits are low?

If your company profits are low, you may need to reduce both your salary and dividend payments to protect cash flow. However, try to keep your salary above £6,708 per year (the Lower Earnings Limit) to maintain your State Pension qualifying year. If profits are very tight, consider deferring dividends until the company generates sufficient distributable profits, and speak with an accountant about the best approach for your specific situation.

Can my company pay into my pension instead of paying me a salary or dividend?

Yes, and this is often a highly tax-efficient option. Company pension contributions are a deductible business expense, reducing your Corporation Tax bill.

Unlike salary, they do not attract National Insurance, and unlike dividends, they are not taken from post-tax profits. Pension contributions do not count as personal income, so they will not push you into a higher tax band.

They are particularly useful if you want to reduce your tax bill while building retirement savings.

What is a director’s loan and when does it become a problem?

A director’s loan occurs when you take money out of your company that is not salary, dividends, or expense reimbursement. If the loan is not repaid within nine months of the company’s accounting year end, the company faces a 35.75 per cent Corporation Tax charge on the outstanding amount. You may also face personal tax charges. Director’s loans should be used carefully and always with professional advice to avoid unexpected tax bills.

This article was originally posted on Nava Accountancy and can be found here How to pay yourself as a Limited Company Director.