How Do Limited Company Directors Get Paid?
- info496449
- Feb 1, 2023
- 4 min read
Updated: Mar 7
Most limited company directors get paid through a combination of salary and dividends. We discuss the changes to the 25/26 tax year and the efficient combination for tax efficiency in the 25/26 tax year.
Most directors tend to be shareholders too, so they both own the company as a shareholder and run it as a director. This means limited company directors can get paid in two ways – through a salary and in dividends. We discuss each below as well as the options for combining both. For expert guidance on dividend declarations and tax implications, don’t hesitate to get in touch. At Lava Sky Accounting, we’re here to help you stay compliant and keep your business financially secure.
Key Tax Changes Effective from April 2025
Employer's National Insurance Contributions (NICs)
The rate will increase by 1.2 percentage points, raising the total to 15%. Additionally, the threshold for employer NICs will decrease from £9,100 to £5,000.
Dividend Allowance
The tax-free dividend allowance remains at £500. Dividends exceeding this amount will be subject to taxation.
Personal Allowance and Tax Bands
The personal allowance is frozen at £12,570, with the basic rate limit and additional rate remaining at £50,270 and £125,570 respectively.
Personal Allowance
Before we get into dividends and salaries it is worth mentioning the personal allowance.
All individuals have a personal tax-free allowance of £12,570 (25/26 tax year) meaning any income under this amount, whether it comes from salary or dividends, is tax-free. For every £2 earned over £100,000 the personal allowance is reduced by £1, so if you earn £125,140 or over your personal allowance is reduced to zero.
Paying limited company directors through salary
Directors are able to receive a salary from their company. Just as with employees, this is processed through the PAYE system where any tax and national insurance contributions are taken before your salary is paid.
Company considerations
The company will need to register with HMRC for PAYE and pay Employer National Insurance Contributions (NIC). Employer NIC is 15% on any salaries above £5,000 a year (25/26 tax year).
Companies may be eligible to claim the employment allowance. This allows the company to reduce the employer national insurance up to a threshold of £10,500 a year. However, companies with only one employee who is also a director of the company cannot claim this.
Salaries and wages are, however, an allowable expense meaning you can take the expense off your income into account in order to lower the company’s corporation tax bill.
Individual considerations
Salaried employees and directors also pay national insurance (NI). National insurance is not applicable for salaries of £12,570 and below. Each employee pays 8% employee NI on any salary income over £12,570 a year and 2% salary income over £50,270 (25/26 tax year).
As a director, the benefit of taking a salary above £6,500 (the lower earnings limit for 25/26) is that it classes as a qualifying year towards your state pension.
For the 25/26 tax year, any income received above your personal allowance of £12,570 is taxed at the following rates.
Basic rate: 20% on taxable income up to £50,270
Higher rate: 40% on taxable income between £50,271-£125,140
Additional rate: 45% on taxable income above £125,140
Paying limited company directors through dividends
A dividend is a payment to the shareholders of a company from the profits. Limited companies may issue interim dividends (at intervals during the financial year) or final dividends at the end of the financial year. These must be declared and approved at board meetings. Provided a director is a shareholder also then they can be paid through dividends.
Company considerations
Unlike salaries, dividends are paid from post tax profit, after corporation tax has been deducted, so they do not lower the company tax bill. Dividends can also only be declared and paid from company profit.
Individual considerations
There is a dividend allowance of £500 (25/26 tax year), meaning the first £500 of dividends received by a company director each year is tax-free. This is in addition to your personal allowance discussed above.
For any dividends received above that figure, the following rates apply for the 25/26 tax year;
Basic rate: 8.75% up to £50,270
Higher rate: 33.75% between £50,271 – £125,140
Additional rate: 39.35% above £125,140
Optimal Salary and Dividend Strategy for 2025/26
For the most tax-efficient remuneration strategy in the 2025/26 tax year, a salary of £12,570, supplemented with dividends, presents an efficient option for limited company directors.
Why a salary of £12,570?
This amount aligns with the Personal Allowance, meaning no Income Tax is payable on the salary itself.
No Employee’s National Insurance (NI) to Pay – The threshold for employee NI is £12,570, so no deductions will be made from this salary. This makes it an optimal level of pay.
Employer’s NI contributions will apply:
Employer’s NI of 15% is payable on earnings above £5,000, which equals £1,135.50.
If the company has additional staff, they may be eligible to claim the Employment Allowance of up to £10,500, covering the employer’s NI liability.
Earning above £6,500 ensures the year qualifies for State Pension and other benefits.
A salary at this level reduces the Corporation Tax bill, as it is deductible as a business expense.
Taking Additional Income as Dividends
Once the £12,570 salary has been taken, any further income can be withdrawn as dividends, which are taxed at lower rates compared to salary. This ensures maximum tax efficiency while minimising National Insurance contributions.
By using this structure, directors can achieve a balance of tax efficiency and National Insurance contributions, ensuring both short-term tax savings and long-term pension benefits.
The exact combination of salary and dividends can depend on your individual and company circumstances. It is always worth talking to your bookkeeper or accountant to get a full overview of options from which to choose.
Get In Touch
Lava Sky Accounting offers bookkeeping and accounting services and packages for Limited Companies. Contact us today to book your free consultation.