How Do You Pay Yourself From a Limited Company?

The Three Core Ways to Extract Money From Your Company

There are three main ways a director can legitimately take money from a limited company:

• Salary: paid through PAYE as remuneration for your work as a director or employee.
• Dividends: distributions of the company’s available profits to shareholders.
• Director’s loans: temporary borrowing from the company, which must be properly recorded and repaid under the relevant rules.

The distinction matters because each route is taxed differently. Salary is subject to PAYE Income Tax and potentially National Insurance, while dividends are paid from profits available for distribution and are taxed as dividend income personally. A director’s loan is different again: it creates a debt between you and the company rather than being ordinary employment income.

Choosing how you extract money therefore affects both your personal tax bill and the company’s tax position.

Paying Yourself a Director’s Salary From a Limited Company

A director can pay themselves a salary through the company’s PAYE payroll. Salary is normally an allowable business expense when calculating the company’s taxable profits, provided the relevant rules are met.

For 2026/27, the standard Personal Allowance is £12,570, although the amount available can be reduced for individuals with income above £100,000. Income Tax rates also differ between Scotland and England, Wales and Northern Ireland.

National Insurance also needs to be considered:

• Secondary Threshold (£96 per week) – Employers start paying secondary Class 1 National Insurance contributions at 15% on employees earning this value or higher, unless this is reduced or eliminated by the Employer’s Allowance.
• Lower Earnings Limit (£129 a week) – While no Employee National Insurance is payable yet, employee earnings of this value or higher start accruing state benefits and pension!
• Primary Threshold (£242 a week) – Employees earing this value or higher start paying Class 1 National Insurance contributions at 8% on their income.
• Upper earnings limit (£967 a week) — Employees earing this value or higher pay Class 1 National Insurance contributions at a reduced rate of 2% on the income that exceeds these values.  In contrast Employers continue to pay secondary Class 1 National Insurance contributions at 15%, unless this is reduced or eliminated by the Employer’s Allowance.

This is why directors often choose a relatively modest salary rather than simply paying themselves the maximum possible amount. The optimum salary is not necessarily the same for every company, particularly where factors such as Employment Allowance, other employment income, State Pension entitlement and the company’s wider tax position are involved.

A salary must be processed correctly through PAYE. Even if you are the company’s only director and employee, payments need to be recorded and reported to HMRC. A Full Payment Submission (FPS) should normally be sent on or before payday.

Paying Yourself a Dividend From a Limited Company

If you are a shareholder as well as a director, you can take dividends in addition to, or instead of, a salary.

A dividend is a distribution of company profits to shareholders. Crucially, a company can only make a lawful distribution from profits available for distribution. A healthy bank balance or strong sales figures do not, by themselves, mean there is enough profit to pay a dividend. The relevant profit calculation must take account of the company’s financial position and other obligations.

Dividends are not deductible expenses for Corporation Tax purposes because they are distributions of profit rather than costs of generating that profit.

For 2026/27, the dividend allowance is £500. Dividend income above the allowance is taxed at:

• 10.75% at the ordinary dividend rate
• 35.75% at the upper dividend rate
• 39.35% at the additional rate

These dividend rates apply across the UK.

Dividends do not attract employee or employer National Insurance, which is one reason they have traditionally formed an important part of many directors’ extraction strategies.

Understanding and Distributing Limited Company Dividends

Paying a dividend should be a deliberate accounting and legal process, not simply a transfer from the company bank account to your personal account.

Before declaring a dividend, you should establish that the company has sufficient distributable profits. You should then retain appropriate records, including dividend vouchers and evidence of the decision to declare the dividend.

For a small owner-managed company, this will commonly include appropriate board minutes or written resolutions.

One of the biggest mistakes is calculating a dividend from turnover or the current bank balance rather than the company’s actual distributable profits. The company may have £50,000 in its bank account but still be unable to lawfully distribute £50,000 to its shareholders.

If a distribution is made when there are insufficient distributable profits, it can be an unlawful dividend and may create a debt owed by the shareholder to the company. Getting the paperwork right does not make an unsupported dividend lawful, the underlying accounts and available profits matter.

Director’s Loans

A director’s loan is money taken from the company that cannot properly be treated as salary, dividend, business expense reimbursement or another legitimate payment.

The amount should be recorded through the company’s Director’s Loan Account (DLA). Unlike salary or dividends, a genuine loan is not automatically personal income when it is advanced. Instead, it creates a debt that the director owes to the company.

Director’s loans can be useful in specific circumstances, but they should not become a casual way of taking money from the business.

The Pitfalls of Using a Director’s Loan Account (DLA)

If your DLA becomes overdrawn, you owe the company money. This needs to be monitored carefully.

For a shareholder-director, a loan that remains outstanding beyond the relevant deadline can trigger a Section 455 Corporation Tax charge. For loans made under the current rules, the rate is linked to the dividend upper rate and is 35.75% for 2026/27. The relevant deadline is generally 9 months and 1 day after the end of the company’s Corporation Tax accounting period.

There is another important rule where the loan exceeds £10,000 at any point in the tax year. It can become a taxable benefit in kind, with the director potentially paying personal tax on the benefit and the company becoming liable for Class 1A National Insurance.

The rules around director’s loans are detailed, so an overdrawn DLA should be addressed promptly rather than left until the company’s accounts are prepared.

Balancing Salary and Dividends for Maximum Tax Efficiency

So, how do you pay yourself as a ltd company director tax-efficiently?

For many profitable owner-managed companies, a combination of salary and dividends can be effective. The salary can provide remuneration and, depending on its level, help maintain National Insurance contribution records, while dividends can provide additional personal income without employee National Insurance.

However, the traditional assumption that “small salary plus dividends is always best” is too simplistic.

From April 2026, dividend tax rates increased to 10.75% and 35.75% for the ordinary and upper rates respectively.  Your other income, available Personal Allowance, Scottish or UK Income Tax position, company profits, Corporation Tax liability and future cash requirements can all change the calculation.

Setting the Right Director Salary

There is no universal salary that every company director should use.

A salary around the relevant National Insurance thresholds can be attractive in some circumstances. In particular, earnings at or above the Lower Earnings Limit can provide access to certain contributory benefit protections without necessarily creating employee National Insurance liability below the Primary Threshold.

But the company’s circumstances matter. Employer National Insurance, Employment Allowance eligibility, other employment and the director’s wider income should all be considered before deciding on a figure.

Whatever salary you choose, operate it properly through payroll and submit the required RTI reports to HMRC on time.

How Much Should You Extract to Stay Tax-Efficient?

There is no single answer to how much to pay yourself from a limited company.

The standard Personal Allowance is £12,570 for 2026/27, but using the full allowance through salary is not automatically the most tax-efficient strategy. A director with other income may already be using some or all of their allowance, while a company with limited cash reserves may need to retain profits to fund Corporation Tax, VAT, operating costs or future investment.

Avoid taking large, unexplained lump sums simply because there is cash sitting in the company account. Your extraction strategy should be based on post-tax company profits, upcoming liabilities and your personal tax position, not the balance shown by online banking.

Comparing Salary vs Dividends

Get Your Limited Company Extraction Strategy Right

Working out how to pay yourself from a limited company is not simply a choice between “salary” and “dividends”. The most tax-efficient and compliant approach depends on your company’s turnover, profit, Corporation Tax position, cash requirements, share structure and your personal circumstances.

If you are unsure whether your salary is set at the right level, whether your company has enough distributable profit for a dividend, or whether your Director’s Loan Account is creating a tax exposure, professional advice can prevent a relatively simple extraction decision from becoming an expensive compliance problem.

QAccounting can help you plan your salary and dividend mix, keep your company compliant and understand what you can safely take from your business. Rather than relying on a one-size-fits-all formula, specialist advice can help you build an extraction strategy around your actual business and personal goals.

FAQs

Should I take salary or dividends from my limited company?

A common approach is to combine a modest director’s salary with dividends where the company has sufficient distributable profits. Salary can provide remuneration and help with National Insurance records, while dividends do not attract employee or employer National Insurance. The most efficient split depends on your personal tax position and the company’s circumstances.

Can I pay myself entirely in dividends?

Yes, if you are a shareholder and the company has sufficient distributable profits, you may choose to receive income entirely through dividends. However, this is not automatically the most tax-efficient option. You should consider your National Insurance record, Personal Allowance, other income and wider financial circumstances before deciding to take no salary.

What happens if I pay myself more than my company makes?

You cannot lawfully pay a dividend simply because the company has enough cash in its bank account. If a distribution exceeds the company’s available distributable profits, it may be an unlawful dividend and can create a debt owed by the shareholder to the company. Depending on the circumstances, that debt may need to be treated through the Director’s Loan Account and can create additional tax liabilities.

If you have already taken more money than the company can support as a dividend, speak to your accountant promptly rather than waiting until the year-end accounts are prepared.