As a new or prospective director and shareholder, one of the questions you may be asking yourself is: “‘How do I pay myself from a limited company?” While not as straightforward as it is for sole traders, there are more options for tax efficiency and planning when paying yourself through a limited company.
Many company owners take a director’s salary through PAYE, just like an employee, and draw dividends on their shareholdings when the company makes a profit. Using a combination of salary and dividends offers flexibility and an opportunity to minimise your personal tax liability.
Furthermore, directors’ loans and various employee expenses are available, all of which can contribute to an overall ‘package’ of benefits. This post will discuss these options for paying yourself from a limited company.
It is common for limited company owners to be directors as well as employees. Like any other employee, directors can take a regular monthly salary through HMRC’s Pay As You Earn (PAYE) system. You need to operate PAYE as part of your payroll.
Salaries and wages are classed as allowable business expenses. This means paying yourself a director’s salary will reduce your company’s taxable profits and Corporation Tax liability.
However, taking a high salary can be less tax-efficient than drawing dividends or combining both. We discuss this in more detail below.
If you intend to pay yourself a salary or hire staff, you must register your company as an employer with HM Revenue and Customs (HMRC). PAYE registration should occur before the first payday but not more than two months in advance.
Limited companies (with between one and nine directors) can register for PAYE online. At Rapid Formations, we include PAYE registration in our All Inclusive Package . PAYE registration can also be added to our other company formation packages as an additional service on the checkout page.
Like any other employee, salaried directors are taxed ‘at source’ through the PAYE system. Your salary will be liable to Income Tax, employee Class 1 National Insurance contributions (NICs), and any other necessary deductions (e.g. Student Loan repayments).
The company will also pay employer (secondary) Class 1 NICs on salary earnings above £5,000 per year (£417 per month).
For tax efficiency, some directors limit their salaries to the NIC Primary Threshold and tax-free Personal Allowance (both £12,570 for the 2026/27 tax year), then draw further payments as dividends.
You can view the latest National Insurance rates for employees and employers online, as well as Income Tax rates (England, Wales, and Northern Ireland) and Scottish Income Tax rates for the 2026/27 tax year.
Many small companies have a sole director and shareholder who owns and controls the entire company. This is common in companies with two or more owners, where each person is a director and a shareholder.
In these scenarios, taking dividends on top of a small director’s salary is usually more tax-efficient than paying yourself only a salary through PAYE. This combination is the most effective in terms of minimising taxation.
A dividend is a payment made to company shareholders from distributable business profits. Typically, dividends are paid to all eligible shareholders based on the proportion of shares they hold.
For example, if you hold all of the shares, you’re entitled to all distributable profits; or where two people hold 50% of the shares, both shareholders are entitled to 50% of the profit.
Directors must declare dividends at a board meeting based on the profit available for distribution. Meeting minutes must be retained to record the decision, even in a sole director company.
In respect of each dividend payment, the directors must create a dividend voucher with the following details:
Copies of the vouchers must be given to each dividend recipient and also retained for the company’s records.
Dividends are distributed from company profits after Corporation Tax . Therefore, unlike salaries, they are not business expenses and cannot be deducted from the company’s Corporation Tax liability.
Shareholders who receive dividend payments are liable to pay tax on any dividend income above £500 (the tax-free allowance) and their Personal Allowance. They do not pay Income Tax or NICs on dividend earnings.
The tax rates that apply to dividend payments are lower than Income Tax rates on salary payments. However, they are based on the individual’s Income Tax bracket:
Salary: 20% (basic rate) 40% (higher rate) 45% (additional rate) Dividend: 10.75% (basic) 35.75% (higher) 39.35% (additional)
The rates of tax on dividends are lower to account for the Corporation Tax that companies pay on profits before distributing dividends to shareholders.
There is no statutory limit on the dividend income you can take from your company. Payments are based on the percentage of shares you hold and the rate of dividend declared by the directors or shareholders.
However, since dividends are paid from company profits, the amount you can take will fluctuate depending on the company’s distributable profit at any given time.
If no profits are available, you cannot pay yourself dividends. Doing so would result in the payment of illegal dividends , which can have serious consequences.
Some business owners will make substantial use of expenses and benefits in addition to taking a salary and dividends. There are many expenses and benefits you can claim as a company director, including but not limited to:
Depending on the type of expense, different taxation and reporting rules apply. You can view the full list of expenses and benefits , along with the relevant tax rules and rates, at GOV.UK.
Each type of expense or benefit is subject to a different amount of tax, and some are tax-free (e.g. certain childcare expenses*). Companies must report and pay taxes on employee benefits to HMRC through PAYE.
* The following forms of ’employer-provided childcare’ are exempt from tax and NICs and do not need to be shown on form P11D:
You can pay tax on expenses every month through PAYE, alongside any payments due on salaries. Additionally, employers must send HMRC details of any expenses and benefits they provide to employees or company directors in the form of an end-of-year expenses and benefits report.
Form P11D must be filed for each director or relevant employee who has received expenses or benefits. It can be filled in and submitted online . This must be done by 6 July following the end of each tax year.
Full records of any benefits and expenses paid to directors and employees must be retained for 3 years from the end of the tax year to which they relate.
HMRC may request that these records be viewed as part of an inspection. Records retained should include:
Any correspondence with HMRC concerning benefits and expenses should also be retained.
Unlike sole traders, whose personal and business finances are generally fluid and interchangeable, limited companies must follow strict processes when directors and shareholders withdraw money from the business.
A director’s loan is one method of making business funds available for personal use other than through salary, dividend payments, and expenses.
A director’s loan is not considered a payment in the same way as a salary or dividends. However, accurate records must be retained because director’s loans are subject to their own tax rules. These records are known as a ‘director’s loan account’.
At the end of each financial year, any money owed to the company as part of the director’s loan account must be included in the balance sheet as part of the annual accounts. Taxes that apply to director’s loans comprise:
If a company director uses any asset belonging to the company for personal use, they are receiving a ‘benefit in kind’ and must declare it for tax purposes. Should a director’s loan account exceed £10,000, it will automatically be classed as a benefit in kind and must be reported on the director’s Self Assessment tax return .
Although Corporation Tax is generally payable on director’s loans, this can be avoided (through tax relief) if it is repaid within 9 months of the end of the relevant Corporation Tax accounting period. However, the amount still needs to be declared.
If a director’s loan is repaid within the 9 months but immediately taken out again, this is known as ‘bed and breakfasting’. HMRC will view this as an attempt to circumvent tax and deny tax relief in respect of any loans over £5,000 that are repaid and then taken out again within 30 days.
Please comment below if you have any questions about this post. If you want to register a company , the best place to start is from Rapid Formations homepage, where you can choose a company name.
For more limited company guidance and small business advice, explore the Rapid Formations Blog .