One of the most common questions new limited company directors ask is how to actually get money out of their company. The answer matters because doing it wrong costs you significantly more tax than doing it right.
Most directors use a combination of salary and dividends. This guide explains how both work, what the most tax-efficient split looks like, and what you need to set up to make it happen.
The Two Main Ways to Pay Yourself
As a limited company director, you have two main methods for taking money from your company:
- Salary through PAYE — a regular monthly payment processed through payroll
- Dividends — a distribution of the company’s after-tax profits to shareholders
Most directors use both. The key is finding the right balance between the two to minimise your overall tax burden legally.
Taking a Salary as a Director
A director’s salary is paid through PAYE just like any other employee. The company deducts Income Tax and National Insurance from the salary and pays them to HMRC.
Most directors pay themselves a low salary, typically set at one of two levels:
| Salary Level | Amount (2024/25) | Why Directors Use This Level |
| Lower Earnings Limit | £6,396 per year | Maintains NI contribution record without paying NI contributions |
| Personal Allowance | £12,570 per year | Uses the full personal allowance, no Income Tax, small NI cost |
The most common approach is to take a salary of £12,570 per year. This uses your full personal allowance (so no Income Tax is due), and the employer NI cost above £9,100 is small. The salary is also a deductible expense for the company, which reduces the company’s Corporation Tax bill.
If your company already employs staff or has other directors, the Employment Allowance may offset employer NI costs further. Speak to an accountant about whether this applies to your situation.
Taking Dividends as a Director
Dividends are payments made from the company’s after-tax profits to shareholders. If you are the sole shareholder as well as the director, you can pay yourself dividends from any profit the company has made after Corporation Tax.
Dividends are taxed at lower rates than salary, which is why most directors take the majority of their income this way.
| Dividend Tax Band | Income Level (2024/25) | Tax Rate |
| Dividend Allowance | First £500 | 0% |
| Basic Rate | Up to £50,270 total income | 8.75% |
| Higher Rate | £50,271 to £125,140 total income | 33.75% |
| Additional Rate | Above £125,140 total income | 39.35% |
Dividends are not subject to National Insurance, which is another reason they are more tax efficient than salary above the personal allowance.
| Important: Dividends can only be paid from profit You cannot pay dividends if the company has no retained profit after Corporation Tax. Paying dividends when there is no profit to support them is called an illegal dividend. HMRC treats these as salary, which means they become subject to Income Tax and NI at the full rate. Always check your company’s profit position before declaring a dividend. |
The Most Tax-Efficient Split for 2024/25
For a director who is the sole employee and wants to draw £50,000 from the company in 2024/25, here is how the numbers work:
| Income Source | Amount | Tax Owed |
| Salary (up to personal allowance) | £12,570 | £0 Income Tax, small employer NI |
| Dividends (within basic rate band) | £37,430 | £3,225 dividend tax at 8.75% |
| Total drawn | £50,000 | Approx. £3,225 personal tax |
| Corporation Tax on profit used for dividends | 19% to 25% before dividend is paid |
Compare this to the same £50,000 drawn entirely as salary: Income Tax at 20% on the amount above £12,570 would be approximately £7,486, plus National Insurance contributions on top. The combined salary and dividend approach saves thousands per year in most cases.
What You Need to Set Up
Step 1. Register as an employer with HMRC. Even if you are the only employee, you must register your company as an employer before you pay yourself a salary. HMRC will give you a PAYE reference number.
Step 2. Set up payroll software. You need RTI-compliant payroll software to submit Full Payment Submissions (FPS) to HMRC on or before each payday. Free options include HMRC’s Basic PAYE Tools.
Step 3. Open a business bank account. Keep company money separate from personal funds. Dividends must be transferred from the company account to your personal account and recorded properly.
Step 4. Pass a dividend resolution. For each dividend payment, the company must formally declare it. For a sole director shareholder, this is usually a simple written resolution recorded in the company’s minutes, along with a dividend voucher.
Step 5. File your Self Assessment return. As a director, you must file a personal Self Assessment return each year, reporting your salary and any dividends received. Dividend tax is paid through Self Assessment, not PAYE.
Other Ways to Take Money From Your Company
Salary and dividends are the main methods, but there are other legitimate ways to take value from your company:
- Pension contributions: the company can pay into your pension directly, which is a deductible business expense and reduces Corporation Tax
- Expenses reimbursement: if you spend personal money on genuine business expenses, the company can reimburse you tax-free
- Director’s loan: you can borrow money from your company, but loans outstanding after nine months from the company’s year end trigger a Corporation Tax charge under S455
- Electric vehicle through the company: a company car can be tax efficient depending on the vehicle’s CO2 emissions
Frequently Asked Questions
How often can I pay myself dividends?
There is no set frequency. You can pay dividends monthly, quarterly, or as a lump sum once a year. Each payment requires a dividend resolution and voucher. Most directors align dividend payments with their cash flow needs and their company’s profit position.
Do I need to run payroll if I pay myself below the Lower Earnings Limit?
If you pay yourself below £6,396 per year (the Lower Earnings Limit for 2024/25), you are not required to register for PAYE or run payroll. However, you will not accrue a qualifying year for State Pension at that salary level. Most directors set their salary at the personal allowance level to both avoid Income Tax and build their NI record.
Can I pay family members as employees of my limited company?
Yes, but only if they genuinely work for the business and the salary paid reflects what you would pay an unconnected person for the same work. HMRC scrutinises income-shifting arrangements closely. Any salary paid must be commercially justifiable.
What happens if I pay myself more than the company has in profit?
If you pay dividends that exceed the company’s retained profit, those dividends are illegal and HMRC will treat them as salary. This creates an unexpected Income Tax and NI liability. Always check your company’s profit position with your accountant before paying dividends.
Is there a limit on how much I can pay myself in dividends?
You can pay up to the total amount of the company’s distributable profit in dividends. There is no upper limit set by HMRC, but you will pay higher rate dividend tax (33.75%) on dividends that push your total income above £50,270.
Need Help Structuring Your Director Pay?
M&B Tax Services helps limited company directors set up their salary and dividend structure correctly from the start. We handle director payroll, dividend resolutions, and Self Assessment returns for company directors across the UK.
We are ICB-regulated accountants based in Rugby. Getting your pay structure right from day one saves thousands in unnecessary tax.
Book a free 30-minute call and we will work out the most tax-efficient approach for your situation.
Joanna Bruty
- On this page