Many of our clients run limited companies. As their accountant, one of the most common questions we’re asked is: “What’s the best way to pay myself?”
For many owner-managers, the answer is a combination of salary and dividends. Getting the balance right can make a significant difference to both your personal tax bill and your company’s finances. As allowances and tax rates have changed significantly in recent years, it’s important to review your situation and determine the right balance for you. It may have changed!
Are you an owner-manager of a limited company?
If so, you are not alone in facing the “how should I pay myself?” dilemma. Companies House estimates that 88% of UK companies (over 1.6 million) have at least one Company Owner Manager (COM). Within this group, 720,720 private limited companies have just one COM. (gov.uk)
Payment Options for Company Owner Managers
- Salary
Directors can also be employees of their limited companies. This means you can pay yourself through your payroll system.
A salary is an allowable business expense, meaning it can reduce your company’s taxable profits and therefore its Corporation Tax bill. However, salaries can also trigger employer and employee National Insurance contribution liabilities.
For 2026/27, your standard tax-free Personal Allowance is £12,570, while employee National Insurance is generally charged at 8% between the primary threshold (£242 per week) and upper earnings limit (£967 per week). Employers generally pay National Insurance at 15% above the secondary threshold (£96 per week or £5,000 per year).
With these contributions in mind, paying yourself a large salary isn’t necessarily the most tax-efficient approach.
- Dividends
Dividends are paid to you as a shareholder from your company’s available, distributable profits. Dividend payments reflect shares owned rather than work carried out.
One major advantage is that dividends do not attract National Insurance contributions.
However, dividend payments could attract a tax liability. For 2026/27, the dividend allowance is just £500. Dividends above this are taxed at 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
Your company must also have sufficient profits to legally pay a dividend.
- A combination of salary and dividends
For many directors, a tax-efficient combination of a modest salary plus dividends can work well. But there isn’t a one-size-fits-all answer.
Your ideal mix will depend on your company’s profits, other income, pension contributions, personal tax position and whether you need to retain funds in the business.
Corporation tax rates range from 19% for smaller profits up to £50,000 to 25% for larger profits over £250,000. Therefore, planning when and how you extract profits is important.
‘The key to paying yourself as a company owner-manager is to plan when you’ll extract funds from your company, rather than simply taking money when you need it,’ explains Shivani, trainee Chartered Accountant at Spicer & Co Chartered Accountants in Dunstable. ‘A little planning can go a long way to minimising your tax liability.’
As your accountant, we can look at the numbers for your particular circumstances and help you decide how much to take as salary and/or as dividends. We can also advise what funds should potentially be left in the company.
Would you like to review your payment arrangement? Talk to the friendly experts at Spicer & Co Chartered Accountants. Let’s arrange an initial discussion without obligation or jargon, just good advice and great coffee!