One of the key considerations for business owners is determining how to structure their remuneration effectively. 

Whether you receive a salary, take dividends, have profit allocations, or other income sources like property rental profits, these choices can significantly impact your expected business profits and how HMRC taxes you.

For example, tax through PAYE has traditionally always resulted in the highest payable amount; however, it is tax deductible within your accounts, and therefore, there will be less Corporation Tax to pay. Recent increases in Employers' National Insurance and Corporation Tax affect these decisions, as well as individuals' long-term goals, both for their business and personally. 

Proper planning, including consulting a good accountant or financial advisor, can help secure personal financial stability and boost business profitability while maintaining tax efficiency. It’s no secret that tax law is particularly complicated, offering various methods for each scenario, each with its own benefits, drawbacks, and implications.

Selecting a strategy typically depends on the business’s structure, cash flow needs, future goals, and tax regulations. Your personal situation is also key: whether you're an entrepreneur without long-term commitments and flexible, or a parent with a mortgage and childcare expenses. Recognising these factors when planning your remuneration ensures that the structure you establish promotes your financial growth and avoids extra unnecessary costs.

With this in mind, let’s discuss the most efficient way for a director to take income from their limited company. 

Understanding business remuneration 

As the director of a company, there are several ways that you can pay yourself. It is important to emphasise that in this guide, we are dealing specifically with business owners of a limited company as opposed to sole traders. To learn more about the different business structures and what they entail, check out this blog.

As a sole trader, any profit your business generates is considered your personal income and is subject to personal income tax. Sole traders usually have significant flexibility in withdrawing funds as income. However, if you are a director of a limited company, you cannot just transfer money into your personal account and label it as income; instead, you must follow a proper formal process.

The two main ways a director gets paid are through a salary, dividends, or both. Deciding the best way to pay yourself will depend on several factors, such as the company’s profits, the personal versus corporate tax implications, and whether you want to preserve certain state benefits like maternity leave, Child Tax Credit, and others.

Here is an outline of how you will be taxed for 2025/26

Business owners should note that taking dividends from the business is not a tax-deductible expense. This leads to higher profits and, consequently, increased Corporation Tax.

Comparing business owner remuneration models: salary vs dividends

Salary

Drawing a salary is one of the simplest methods for business owners to pay themselves and is familiar to most. Typically, as an employee of a limited company, you have an employment contract and are registered under the Pay As You Earn (PAYE) scheme, which HMRC uses to collect National Insurance Contributions (NICs) and Income Tax from all limited company employees. Every time you pay yourself a salary, you must submit a PAYE return with the relevant details to HMRC.  

The benefit of a salary and being registered for PAYE is that you can build up qualifying years towards a state pension, retain state benefits, and it’s easier to get loans, mortgages and insurance policies.  A salary is also considered an expense on a company’s balance sheet, so paying yourself a salary can be a way to reduce your corporation tax liability. However, receiving salary remuneration means that the director and the company have to pay National Insurance Contributions (NICs). Salaries also attract higher rates of income tax as opposed to dividends. Lastly, if you have an employment contract, you will need to comply with National Minimum Wage requirements. For this reason, many director-shareholders do not have one. To learn more about National Minimum Wage requirements, read our blog here.

Some examples of the tax implications under PAYE, depending on your salary.

Note, as above, all of these costs are tax deductible in your LTD accounts, and therefore, depending on your profits, there could be up to a 25% variance on your Corporation Tax calculation. 

Should I take a high or low salary?

There is a yearly salary level at which the director pays 0% National Insurance but still qualifies for pension, sickness, and other benefits, which is £5,000 for the 24/25 tax year. You can also choose to pay yourself £12,570, which is the personal tax allowance limit, so you won't need to pay income tax until your income exceeds that amount. However, you need to consider National Insurance (NI).

National Insurance is a tax on earnings paid by both employees (from their salary) and employers (in addition to wages). The NI threshold is lower than the personal tax allowance. For example, if you pay yourself £12,570, the employer's NI liability will be about £1,136, which has increased by 236% from 2024/25 to 2025/26. However, if your company's profits are £50,000 or less, the additional NI cost is offset by higher corporation tax savings, since the salary is considered an expense. Additionally, if your company has two or more directors on the payroll, you can take up to £12,570 without paying NI contributions, thanks to the £10,500 Employment Allowance for 2025/26.

Paying yourself £5000 might be simpler by avoiding additional tax calculations. Still, before making a decision, it’s best to talk to an accountant who can assist with this, including exploring options like claiming Employment Allowance or other tax-efficient remuneration strategies. Contact us if you’d like more information. It’s worth mentioning, however, that individuals benefit from both the Class 1 National Insurance allowance via PAYE and the Class 4 allowance through self-assessment, which helps build up their eligibility for several state benefits. Therefore, it’s advisable to utilise at least the £12,570 allowance as a small salary under PAYE. 

Dividends

Unlike a salary, which can be paid even if a business is making a loss, dividends are only paid when the company is making a profit. This means that after Corporation Tax and any other expenses have been accounted for. You do not need to pay National Insurance contributions on dividends, but you are subject to income tax, which ranges depending on your total income amount. To have maximum tax efficiency and retain certain employment rights, you can combine dividend payments with a salary. 

The table below shows some examples of how dividends can affect your taxes, depending on your salary. As previously mentioned, dividends are not tax-deductible, which means your Corporation Tax calculations could vary by up to 25%. 

How to issue a dividend

Firstly, the business must generate sufficient profit to pay the dividend, either from the current year's earnings or from accumulated profits from previous years. 

The amount a shareholder receives as a dividend is subject to the director's discretion. The company may decide not to pay a dividend, retain the profits, and distribute dividends at a later date.

To issue a dividend, the company needs to hold a meeting of directors and have the meeting minuted, even if it’s just you. 

The best way to pay yourself as a director and the tax implications

^{* higher CT = higher LTD profits = good for exit strategy}

The above table highlights that the most tax-efficient way for business owners to take remuneration is still to receive a small salary and the rest as dividends. Other factors to consider include personal pension contributions, which will increase your basic rate tax band by 125% of the contributions made. 

For example, if you contribute £10,000 to your pension, this will raise your tax bands by £2,500, meaning more of your income is taxed at a lower rate. This strategy becomes particularly valuable if your earnings surpass £50,000 and £125,000. The maximum contribution is limited to the annual allowance of £60,000. 

Additionally, if a business owner is seeking credit in the near future, being paid through PAYE will generate higher gross earnings than other income sources via self-assessment. This is because the income tax paid is included within the gross earnings, rather than being taxed separately as with other self-assessment income. This can be advantageous when applying for a mortgage, as lenders tend to regard PAYE income as stable, reliable, and more highly regarded, potentially offering better product options.

Impact of business owner remuneration on company success

The impact of how a business owner chooses to compensate themselves can significantly influence the overall success and financial health of the company. That’s why you should always adjust the strategy depending on the business’s goals at a specific time.

Opting to take dividends from the company's profits, rather than a salary, can lead to several notable effects. As discussed above, this approach often results in higher recorded profits and increased retained earnings within the company. Consequently, this can cause an increase in the company's Corporation Tax liability, as dividends are paid out of profit after tax.

From a strategic perspective, this method of remuneration can be advantageous, particularly if the business owner is considering an exit strategy in the future. The enhanced profits and retained earnings contribute to a higher overall valuation of the company, making it more attractive to potential buyers or investors. In summary, while taking dividends may increase certain tax obligations, it can also serve as a beneficial tactic to boost the company's market value and financial standing in preparation for an eventual sale or succession plan.

Alternatively, if your goal is to continue operating the business, build up state benefits, and take out a mortgage, then taking a salary might be more suitable. Since there is no one-size-fits-all answer, it's always best to discuss your remuneration package with your accountant. Feel free to contact us if you have any questions.