If you have set up a limited company, one of the first questions you will face is how to pay yourself. It is a common consideration for directors and small business owners because there is more than one way to take money out of your company, and each method has different tax implications.

From salaries and dividends to directors’ loans, the options can seem confusing at first. This guide explains the main ways to pay yourself, how each one works, and the tax factors to consider. By the end, you will understand how to take money from your company legally, efficiently and in a way that supports your long-term financial goals.

Option 1: Pay Yourself a Salary

One of the simplest ways to pay yourself from your limited company is through a salary. This treats you like any other employee and means your pay is processed through PAYE, with income tax and National Insurance deducted before you receive your wages.

For the 2025/26 tax year, the personal allowance remains £12,570. This is the amount you can earn before paying income tax. Keeping your salary around or slightly below this level can be tax-efficient, as it minimises National Insurance while still maintaining your entitlement to the state pension.

If you pay yourself a salary, your company must be registered for PAYE and will need to report payroll information to HMRC each month. Salaries provide predictable income, which can be useful when applying for mortgages or managing household budgets.

While relying solely on a salary is not always the most tax-efficient option, it does offer stability and ensures your contributions to the state system continue as normal.

Option 2: Take Dividends

Dividends are another common way for company directors to pay themselves, but they work differently from a salary. In simple terms, dividends are payments made to shareholders from the company’s profits after corporation tax has been paid. You can only take dividends if your company has enough retained profit, so they are not available if the business is running at a loss.

The process for declaring dividends is straightforward, but it must be done correctly. You should hold a board meeting (even if you are the only director), declare the dividend, record it in the minutes, and provide a dividend voucher showing the amount paid. These records are important in case HMRC requests evidence that your dividends were issued properly.

For the 2025/26 tax year, the dividend allowance is currently £500. Dividends above this amount are taxed at different rates depending on your income band. One of the key advantages of dividends is that you do not pay National Insurance on them, which often makes them more tax-efficient than salary payments.

Combining Salary and Dividends

Many company directors choose to combine salary and dividends rather than rely on one method alone. This approach usually provides the best balance between tax efficiency and financial stability, as it allows you to minimise tax while maintaining National Insurance contributions and pension entitlement.

A common strategy is to pay yourself a modest salary up to the personal allowance limit (£12,570 for 2025/26) and take the rest of your income as dividends. This helps you stay within lower tax bands and keep National Insurance costs down while still ensuring eligibility for the state pension and other benefits.

For example, a contractor earning £60,000 in company profits might take a £12,570 salary and withdraw the remaining amount as dividends. This combination would reduce their overall tax and National Insurance liability while maintaining pension contributions.

This mixed approach is also flexible. If profits are lower in a given year, you can rely more on salary. In stronger years, dividends can make up a larger share of your income. The key is to keep accurate records and ensure all withdrawals are properly declared so that everything remains compliant with HMRC rules.

Other Options: Reimbursements & Director’s Loans

In addition to salaries and dividends, there are other ways to take money from your limited company, although they tend to be more complex and should be handled carefully.

If you have paid for business expenses personally, such as office supplies, travel, or software subscriptions, you can reimburse yourself through the company. To do this correctly, you must keep receipts and ensure that each cost is wholly and exclusively for business purposes. Proper documentation will protect you if HMRC ever reviews your accounts.

Another option is a director’s loan. This is when the company lends you money that you later repay. It can be useful for short-term cash flow, but it must be managed properly. Taking money without recording it correctly can lead to additional tax liabilities or penalties. For example, loans over £10,000 can be treated as a taxable benefit, and unpaid balances may be subject to additional corporation tax. It is always best to seek professional advice before using this approach.

Keeping Your Company Compliant

Even with a clear plan, it is easy to make mistakes that can lead to tax issues or compliance problems. Some common mistakes include:

• Taking dividends without sufficient profit: Dividends can only be paid from post-tax profits, not from general cash reserves.
• Failing to register for PAYE before paying yourself a salary: HMRC requires registration and payroll reporting before any director’s salary is processed.
• Misusing the director’s loan account: Withdrawing company funds incorrectly or leaving the loan unpaid can trigger additional tax charges.
• Poor record-keeping: Not maintaining dividend vouchers, payroll records or expense receipts can cause problems during an HMRC review.

Being compliant from the start saves time, money and stress later. Paying attention to detail and keeping accurate records helps ensure your pay stays within the rules.

When to Speak to an Accountant

Every company director’s situation is different, and what works well for one business may not suit another. An accountant can help you create a tailored remuneration plan that balances salary, dividends, pension contributions and other benefits in a tax-efficient way.

Contact Reed Accountants to discuss how your pay can be managed effectively and in full compliance with current legislation. Our experienced team can help you maximise your company’s profits while keeping everything transparent and compliant.

Structuring Your Pay the Right Way

There is no single best way to pay yourself from a limited company. The right approach depends on your company’s profits, your personal circumstances and your long-term goals. A combination of salary, dividends and pension contributions often provides the most balanced and tax-efficient solution.

Whatever method you choose, careful planning and accurate record-keeping are key. By working with a qualified accountant, you can ensure your pay structure is managed legally and efficiently, supporting both your business and personal financial goals.