How to pay yourself from your business

In this article, we outline how directors of  their own company might pay themselves and what you need to consider when deciding on the make-up of your directors’ pay. 

What you need to know about directors’ salaries

You should think about the tax efficiency of taking a director’s salary at different levels for maximum efficiency. By receiving a director's salary of £559 or more per month (2026/27) you maintain your national insurance record, giving you access to certain state benefits, such as the state pension.  

Furthermore, the salary is a tax-deductible expense for your company. If your company is your main source of income, your monthly salary payment should not be subject to income tax or employee’s NICs up to a maximum of £1,048 per month) or employer’s NICs up to £416 per month (2026/27).  

If you do opt to pay yourself a director's salary above £ £559 per month (2026/27), your company will need to register as an employer and run payroll which complies with Real-Time Information (RTI) rules.  

To discover more on the advantages and disadvantages of a directors' salary, read our comprehensive Guide to Directors' Pay. 

Sole-director limited companies are not eligible for Employment Allowance, but paying yourself a salary may still have many advantages.

What is a dividend?

Dividends are company profits paid out to shareholders. Your board of directors decide if dividends should be paid and how much those dividend payments should be. Dividends must be paid out of profits and will be paid to shareholders in accordance with their shareholdings. They are not tax-deductible expenses and there must be paperwork to document dividends, such as a board meeting minutes and dividend vouchers. 

How does the tax on dividends work?

Dividends are paid from a company’s post-tax profits and are subject to income tax when you receive them. For 2026/27, the first £500 of dividends is covered by the dividend allowance and is tax-free. Dividends you receive that are not covered by the dividend allowance are subject to the following dividend income tax rates (2026/27): 

• Basic rate – 10.75%
• Higher rate – 35.75%
• Additional rate – 39.35%

Example

For this example, we will assume that you have no other income. Any other sources of income (such as rental income, bank interest etc.) would impact your tax position. The figures are using the rates and threshold for 2026/27. 

Your annual salary is £5,000, made up of 12 monthly payments of £416.66. By taking this from your company, you can then pay £500 plus the remainder of your personal allowance as dividends without any tax i.e. £12,570 personal allowance less the salary of £5,000 = £7,070 + £500. This means a total of £7,570 in dividend income will be tax free.

Once the above has been taken into consideration, the next £37,700 of dividends will be subject to tax at a rate of 10.75%. 

If dividend income exceeds £45,270 (£500 + £7,070 + £37,700), it will attract tax at a minimum rate of 35.75%. Should your total income exceed £100,000, you should always review the tax allowances and reliefs available to you with an accountant, as at this level you may start to lose your personal allowance at a rate of £1 for every £2 of additional income. 

 

What about Scottish taxpayers?

Scottish taxpayers have their own income tax bands and rates set by the Scottish Government, but they only apply to earned income and not dividends. The personal allowance and the bands and rates for dividend income are set by the UK Government. Unless you’re intending to have a salary greater than the personal allowance (£12,570 for 2026/27), your income is unlikely to be subject to the Scottish bands and rates.

This assumes all your income comes from the company and consists of mostly salary and dividends. It is also worth noting that from April 2027, new property income tax rates are due to come in for England, Wales and Northern Ireland. They will initially be set at 2% higher than the standard income tax rates i.e. 22%, 42% and 47%. The Scottish Government has not yet announced whether property income will be taxed at different rates for Scottish taxpayers.

Are there any other ways to pay yourself?

When determining your director's salary, bonus and dividends, consider external factors. We recommend you seek advice from an accountant to help you choose the best payment options for both you and your company. 

Some other options available to take money out of the company include:  

• Consider transferring shares to spouses to utilise their dividend allowance.
• Make a claim from the company for ‘use of home as office’.
• Make pension contributions from the company.
• Charge the company interest on any directors loans you’ve made to it.

But with all these options, there are considerations and criteria to take into account, as well as paperwork to get in place. We would not recommend doing any of these without taking professional advice as the tax and regulatory consequences if you get things wrong can be expensive and time consuming to put right.  

What are payments on account?

A payment on account (POA) is an instalment you pay towards the income tax due in the following year. You will be expected to make a payment on account if your tax bill exceeds £1,000 and less than 80% of your income tax liability is collected by Pay As You Earn (PAYE).

If you receive dividends that exceed your personal allowance and dividend allowance, it is highly likely that you will have an income tax bill to pay. 

If your income tax bill is more than £1,000, you will have to pay this income tax by 31st January after the tax year end as well as a POA, which is half your bill again. This can be a significant cost.  

How can I avoid payments on account?

To reduce the impact on your cashflow, you could decide to have some of your income tax collected through your tax code.

If you opt to have tax collected through your tax code, you will find larger deductions of tax are made from your monthly salary via PAYE. POAs are due for payment in January and July and you should then have much smaller POAs to make.  

Some people prefer to keep their cash in their bank account for as long as possible and so prefer the POAs route. 

Last updated: 19th June 2026