A director who owns their company can take money out as salary, as dividends, or as a mix of both. Most owner directors take a modest salary through PAYE, then draw the rest as dividends from profit the company has left after Corporation Tax. Salary carries Income Tax and National Insurance but reduces the company’s taxable profit. Dividends face no National Insurance and have their own lower rates, which is why the blend is so popular.
Deciding how to pay yourself is one of the first questions every director shareholder faces. There is no single right answer, but understanding how each type of income is taxed lets you and your accountant choose a split that fits your circumstances and stays inside the rules.
How can a director take money out of a company?
A limited company is a separate legal person, so its money is not automatically yours. As a director shareholder you can be paid a salary for the work you do, receive dividends on the shares you hold, reclaim legitimate expenses, or borrow through a director’s loan account. Salary and dividends are the two routes most owners rely on for regular income, and each is taxed in a very different way. For a fuller tour of how the pieces fit together, see our accountancy and tax guide.
How is a salary taxed?
A salary is paid through PAYE and counts as employment income. In 2025/26 and 2026/27 the Personal Allowance is £12,570, so earnings up to that level are free of Income Tax. Above it, Income Tax runs at 20 per cent to £50,270, 40 per cent to £125,140, then 45 per cent. Salary also attracts two sets of National Insurance: the employee pays Class 1 at 8 per cent on pay above the primary threshold of £12,570, and the company pays employer National Insurance at 15 per cent on pay above the secondary threshold of £5,000. The upside is that salary and employer National Insurance are deductible business costs, so they reduce the profit charged to Corporation Tax.
How are dividends taxed?
Dividends are paid from profit the company has left after it has paid Corporation Tax. They carry no National Insurance for either the company or the shareholder, which is a large part of their appeal. Every individual has a dividend allowance of £500, taxed at 0 per cent. Dividends above that allowance are taxed at rates that sit inside your Income Tax bands, so the rate depends on how much other income you already have. Because dividends come from taxed profit, the headline dividend rates look lower than salary, but the profit has already been reduced by Corporation Tax before it reaches you.
What are the dividend tax rates for 2025/26 and 2026/27?
For 2025/26 the rates above the £500 allowance are 8.75 per cent in the basic band, 33.75 per cent in the higher band and 39.35 per cent in the additional band. From 6 April 2026 the basic and higher rates each rise by 2 percentage points, so for 2026/27 they become 10.75 per cent, 35.75 per cent and 39.35 per cent. The dividend allowance stays at £500 in both years, and the Personal Allowance and Income Tax bands are unchanged. The increase narrows, but does not remove, the gap between dividends and salary.
Why do many directors combine a small salary with dividends?
The common pattern is a modest salary topped up with dividends. A salary set around the £12,570 Personal Allowance uses your tax free band, keeps you within the National Insurance system for state pension purposes, and creates a deductible cost for the company, while producing little or no Income Tax. Dividends then deliver the rest of your income without National Insurance. The employer secondary threshold of £5,000 and the Employment Allowance of £10,500 both affect the sums, so the most efficient salary level varies. The right figure depends on your other income, whether the company can claim the Employment Allowance, and whether other shareholders are involved.
Do dividends have to come from available profit?
Yes. A dividend is only lawful if the company has enough retained profit to cover it after all its liabilities, including Corporation Tax. Paying one when the profit is not there creates an unlawful, or ultra vires, dividend that HMRC or a liquidator can challenge, and it may be reclassified as salary or as a loan. Each dividend needs proper paperwork: a board minute approving it and a dividend voucher for each shareholder showing the date, the company, the shareholder and the amount. If you draw money before the profit is confirmed, it usually goes to your director’s loan account and can trigger its own tax charges.
What else should you weigh up?
Dividends are usually lighter on tax, but they are not always the answer. They do not count as relevant earnings for pension contributions in the way salary does, they can reduce mortgage borrowing capacity if a lender looks only at salary, and they offer no statutory sick or maternity pay. A salary gives a predictable, deductible cost and builds your National Insurance record. Retaining profit in the company, rather than drawing it, is another option. This page explains the mechanics rather than giving personalised advice, so the best split for you should be checked with your accountant against your own figures each year.
Getting the salary and dividend split wrong, or drawing dividends without the profit to back them, is exactly the sort of thing an HMRC enquiry can probe, whether through an employer compliance review or an IR35 question about how directors are paid. If HMRC opens an enquiry, a Solar Protect tax investigation policy can cover up to £100,000 of your own accountant’s fees with no excess, so your adviser can defend your position in full. Get a quote to protect your business.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.