How Do Limited Company Directors Get Paid?

One of the most common questions we are asked by new and existing company directors is: how should I pay myself from my limited company?

Unlike sole traders, directors do not simply withdraw profit from the business. Instead, there are structured and tax-regulated ways to extract income.

For the 2026/27 tax year (6 April 2026 to 5 April 2027), this guide explains the main ways directors are paid, the tax implications of each method, and what has changed for the new tax year.

This article provides general guidance only. The most suitable remuneration strategy will always depend on your personal circumstances and your company’s financial position. If you would like Lava Sky Accounting to review your 2026/27 remuneration strategy please get in touch to arrange a discussion.

Key Changes for 2026/27

A few headline points for 2026/27:

• The Personal Allowance remains £12,570 (and is reduced once income exceeds £100,000).

• The Dividend Allowance remains £500.

• Dividend tax rates increase from 6 April 2026:

  • Basic rate: 10.75% (increase by 2%)

  • Higher rate: 35.75% (increase by 2%)

  • Additional rate: 39.35% (remained the same)

    
    

Although dividends are still generally more tax-efficient than salary due to the absence of National Insurance, the increase in dividend tax rates means the overall tax savings are now smaller than they were in previous years.

Related: End of Tax Year Planning: A Guide for UK Company Directors

Salary

Directors can pay themselves a salary through PAYE, just like any other employee.

Importantly, salary is a reward for the work you perform as a director or employee of the company. It is earned income and is treated in the same way as any other employment income for tax purposes.

Salary is:

• Subject to Income Tax

• Subject to Employee’s National Insurance

• Subject to Employer’s National Insurance (paid by the company)

• Deductible for Corporation Tax purposes

Income Tax Bands (2026/27)

• 20% basic rate on taxable income up to £50,270

• 40% higher rate on income above £50,270

• 45% additional rate on income over £125,140

Personal Considerations

From a personal perspective, salary:

• Uses part (or all) of your Personal Allowance

• Is taxed in real time through PAYE, meaning there is no later tax bill to budget for

• Triggers Employee’s National Insurance once thresholds are exceeded

  
  

For some directors, particularly those who prefer simplicity and predictable monthly income, a higher salary approach may feel more straightforward.

Company Considerations

From the company’s perspective, salary:

• Reduces Corporation Tax profits

• Triggers Employer’s National Insurance once thresholds are exceeded

• Must be processed through payroll with Real Time Information (RTI) reporting

Taking Salary Towards the End of the Tax Year

Some directors choose to take a minimal salary during the year and then review their position before 5 April.

While this can work in certain situations, salary must still be processed correctly through payroll and reported to HMRC. The timing of salary payments can affect National Insurance calculations and cash flow, so this approach should be planned rather than done informally.

Dividends

Dividends are payments made to shareholders from company profits after Corporation Tax has been paid.

Unlike salary, dividends are not a reward for work - they are a distribution of profits to shareholders. You can only receive dividends if you are a shareholder, and they must be paid in proportion to shareholdings.

Directors who are also shareholders can therefore receive dividends, but only where sufficient retained profits exist.

Dividends:

• Are not subject to National Insurance

• Are taxed personally through Self Assessment

• Must be paid from company profits

• Must be properly declared and documented

For 2026/27:

• Dividend Allowance: £500

• Dividend tax rates:

  • 10.75% (basic rate band)

  • 35.75% (higher rate band)

  • 39.35% (additional rate band)

Unlike salary, dividend tax is not deducted at source. Tax is usually payable by 31 January following the end of the tax year, so directors must budget accordingly.

Related: How to Properly Declare Dividends as a UK Limited Company Director

Personal Considerations

From a personal perspective, dividends:

• Do not attract National Insurance

• Taxed at lower rates than salary (depending on your income level)

• Require you to manage and set aside funds for your future tax bill

Company Considerations

From the company’s perspective, dividends:

• Can only be paid from available profits after Corporation Tax

• Do not reduce Corporation Tax (as they are paid from post-tax profit)

• Require appropriate documentation and compliance procedures

Pension Contributions

Company pension contributions are another tax-efficient way for directors to extract value.

For 2026/27:

• The standard Annual Allowance is £60,000

• The allowance can taper where adjusted income exceeds £260,000, subject to threshold income rules down to a minimum of £10,000

• Unused allowances from the previous three tax years may be available for carry forward

  
  

Company contributions:

• Reduce Corporation Tax

• Are not subject to National Insurance

• Do not create personal income tax at the point of contribution

Pensions are typically used as part of longer-term financial planning rather than day-to-day income extraction.

The Common Salary and Dividend Combination Strategy

For many directors who are basic or higher-rate taxpayers, a commonly used tax-efficient approach is:

• A salary of £12,570, and

• The remainder of income taken as dividends, up to the desired level.

This approach can be tax-efficient because:

• The salary uses the tax-free Personal Allowance

• Counts as a qualifying year for the State Pension

• The salary is an allowable expense for Corporation Tax

• Dividends do not attract National Insurance

However, this is not automatically optimal for everyone, particularly additional rate taxpayers, or directors with other income; alternative strategies may be more appropriate.

Simple Salary Only Strategy

It is also worth noting that due to the increase in dividend tax rates from 6 April 2026, the tax advantage of dividends over salary has reduced. While dividends are still often more tax-efficient overall, the gap is narrower than it once was.

For some directors who prefer simplicity and do not wish to manage dividend declarations and future tax payments, a higher salary model may now be less tax-inefficient than it was previously and worth considering.

How Lava Sky Accounting Can Help

Determining how to pay yourself is not simply about choosing the lowest tax rate. It requires coordination between personal tax, corporation tax, compliance requirements and long-term planning.

At Lava Sky Accounting, we review our director clients’ remuneration strategies annually to ensure they remain compliant and aligned with their goals.

If you would like us to review your 2026/27 remuneration strategy and confirm whether your current salary/dividend structure remains appropriate, please get in touch to arrange a discussion.