How to Pay Yourself as a Limited Company Director: A Practical Guide for 2026/27
The April 2026 dividend tax increases changed the calculation. The advantage of salary-plus-dividends is smaller than it was — and pensions are now more attractive than ever. Here’s a practical guide to the main methods, the key numbers, and the most tax-efficient approach for most directors.
The three ways to pay yourself
Paid through PAYE, subject to income tax and National Insurance. Reduces company profit and therefore Corporation Tax. Builds State Pension record. The foundation of most directors’ remuneration structures.
Paid from post-Corporation Tax profits. Not subject to National Insurance — which is what makes them attractive. Taxed at dividend rates (10.75% basic rate from April 2026). Can only be paid from distributable profits; require documentation.
Paid by the company directly into a pension. Deductible against Corporation Tax. Not subject to NIC. Not treated as personal income. More tax-efficient than dividends at every income level in 2026/27 — the April rate changes widened the gap further.
How salary works for directors
As a director, you’re an employee of your own company. The company pays your salary through PAYE, subject to income tax and National Insurance. Crucially, salary is tax-deductible — it reduces the profit on which Corporation Tax is calculated.
| Threshold | Amount (2026/27) | What it means |
|---|---|---|
| Personal Allowance | £12,570 | No income tax on earnings below this amount |
| NIC Primary Threshold | £12,570 | No employee NIC below this amount |
| NIC Secondary Threshold | £5,000 | Company pays 15% employer NIC on salary above this amount |
| Lower Earnings Limit | £6,500 | Minimum salary to earn a qualifying year for State Pension without paying NIC |
The three optimal salary levels for 2026/27
Avoids all employer NIC (the company pays 15% only on salary above £5,000). Trade-off: falls below the Lower Earnings Limit, so this year won’t count towards your State Pension record unless you make voluntary NIC contributions. Best suited to directors who have other sources of NIC credits.
Earns a qualifying State Pension year — even though no actual NIC is paid. The company pays approximately £225 in employer NIC (15% on the £1,500 above the Secondary Threshold). No income tax. A sensible floor for directors who want to protect State Pension entitlement at minimal cost.
The most widely used option. No income tax. No employee NIC. Full qualifying year for State Pension. Employer NIC of £1,136 (15% on £7,570, the amount between £5,000 and £12,570) — partially offset by the Corporation Tax deduction on the salary. For most sole director companies, this remains the optimal level.
How dividends work
Dividends are payments from the company’s retained profits after Corporation Tax. They’re not subject to National Insurance — which is why they’re attractive to director-shareholders.
Dividend tax rates for 2026/27
| Dividend income | Tax rate from April 2026 | Previous rate |
|---|---|---|
| First £500 (dividend allowance) | 0% | 0% |
| Basic rate band (up to £50,270 total income) | 10.75% | 8.75% |
| Higher rate band (£50,270–£125,140) | 35.75% | 33.75% |
| Additional rate (above £125,140) | 39.35% | 39.35% |
Key rules on dividends
- Dividends can only be paid from distributable profits. You cannot pay a dividend that exceeds the company’s available reserves. If you do, it’s an unlawful distribution with serious consequences.
- Documentation is required. Each dividend payment needs a board minute and a dividend voucher (certificate) showing the amount, date, and tax credit. These don’t need to be complex, but they must exist.
- The higher rate threshold matters. With a £12,570 salary, you have approximately £37,700 of dividend capacity before hitting the higher rate band. Taking more pushes dividends from 10.75% to 35.75% — plan ahead.
Worked example: £60,000 company profit
A sole director company with £60,000 profit before the director’s salary, taking a £12,570 salary and remaining profits as dividends:
| Step | Amount | Notes |
|---|---|---|
| Company profit before salary | £60,000 | |
| Director salary | £12,570 | No income tax or employee NIC; saves ~£2,388 in Corporation Tax |
| Employer NIC on salary | £1,136 | 15% on £7,570 (salary above £5,000 threshold) |
| Taxable company profit | ~£46,294 | After salary and employer NIC deductions |
| Corporation Tax (19%) | ~£8,796 | Small profits rate applies below £50,000 |
| Post-tax profit available for dividends | ~£37,498 | |
| Dividend tax (first £500 at 0%, remainder at 10.75%) | ~£3,983 | Total income stays within basic rate band |
| Approximate take-home | ~£46,085 | Effective rate ~23% — vs ~30–33% as sole trader at same profit |
Pension contributions: increasingly important in 2026/27
The April 2026 dividend tax increases have made employer pension contributions even more attractive. Here’s why they deserve more attention than most directors give them:
| Feature | Dividends | Employer pension contributions |
|---|---|---|
| Corporation Tax deductible | No — paid from post-tax profits | Yes — reduces company profit before CT |
| Subject to NIC | No | No |
| Treated as personal income | Yes — taxed at 10.75–39.35% | No — goes directly into pension |
| Access | Immediately available | Locked until age 57 (rising to 58 in 2028) |
| Annual limit | Limited by distributable profits | Up to £60,000 per year (annual allowance) |
For income you can afford to defer, employer pension contributions are significantly more efficient than dividends at every tax band. The practical limitation is access — pension money can’t be touched until age 57, so this only works for income you genuinely don’t need now.
Directors’ loans
A director’s loan account (DLA) tracks money borrowed from or lent to the company. Key points:
- Borrowing from the company: if you owe the company money at the end of its accounting period, it must pay S455 Corporation Tax of 33.75% on the outstanding balance. This is repayable when you repay the loan — but it ties up cash. Loans over £10,000 may also trigger a benefit in kind charge.
- Lending to the company: if you’ve put personal money into the company, you can draw it back as repayment of a director’s loan — no income tax or NIC, because it’s repaying money the company already owes you.
- Keep it up to date: review your DLA with your accountant at each year-end. An unintentional overdrawn DLA can create unexpected tax bills.
Expenses
Directors can reclaim legitimate business expenses from the company without them counting as taxable income, provided they’re “wholly, exclusively and necessarily” incurred for business purposes. Common legitimate examples:
- Business travel — mileage at HMRC advisory rates (45p/mile for the first 10,000 miles per year), train fares, hotels and meals during business trips
- Phone and broadband — the business-use proportion, calculated honestly
- Equipment — purchased for business use, properly documented
- Professional subscriptions and training — relevant to your role and the company’s business
- Use of home as office — a modest flat rate or a carefully calculated proportion of home costs
Claiming personal expenses through the company is treated as a benefit in kind or a director’s loan — both carry tax consequences. Keep receipts, document the business purpose, and be honest.
Practical steps
- Decide your salary — for most sole director companies, £12,570 is the starting point. Adjust if you have Employment Allowance or other income.
- Register for PAYE — required even if you’re the only director. Use payroll software to run payroll and submit RTI reports.
- Check available profits before paying dividends — confirm distributable reserves with your accountant. Cash in the bank ≠ profits available for dividends.
- Prepare dividend documentation — a board minute and dividend voucher for each payment, dated and signed.
- Consider pension contributions — particularly if you’re approaching the higher rate band or want to retain profits tax-efficiently.
- File Self Assessment — directors with dividend income must file a personal Self Assessment return each year, in addition to the company’s Corporation Tax return.
- Review annually with your accountant — thresholds and rates change every April. What was optimal last year may not be this year.
Useful resources
- HMRC tax on dividends — gov.uk/tax-on-dividends
- HMRC directors’ loans — gov.uk/directors-loans
- HMRC PAYE for employers — gov.uk/paye-for-employers
- Your accountant — the optimal salary/dividend split depends on your specific numbers and changes annually. A one-hour annual review is money well spent.
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