We have produced this quick guide to explain how to pay yourself from your limited company.
An important thing to remember first! When you incorporated your limited company you created a new entity that is separate from yourself, the company will have its own assets, liabilities and legal status. As a director you will be responsible for managing the company and as a shareholder you will own part or all of the company entitling you to the business profits. The money you collect through your business is not yours to take as and when you please, the money belongs to the company and you must extract any remuneration through an appropriate channel.
When you pay yourself, you can make payment as one of the following – Salary, Expense Reimbursements, Dividends or a Directors Loan.
Salary
As the director of your limited company, contractors are treated as an employee for tax purposes. The practical upshot of this is that you must register with HMRC to use PAYE to pay your salary (we do this for you), and you need to adhere to the new RTI filing scheme.
RTI is a new way of reporting to the HMRC details of your employment income. It affects every single employer in the UK from April 2013 and has been touted as the ‘biggest change to PAYE since 1944’. Under RTI we are required to report your salary to the HMRC every time you pay yourself.
– Many directors choose to set their salary at £12,570 per year which maximises tax efficiency and minimises PAYE and employees NI contributions.
– This salary still counts as a contributing year for your UK State Pension eligibility.
Option 1 –Most Tax-Efficient
Monthly Salary: £1,047.50 (Annual Salary: £12,570)
This salary uses your full tax-free Personal Allowance.
For Single Director Companies:
• This is the most tax-efficient strategy overall.
• The company must pay Employer’s National Insurance Contributions (NIC) of £1,135.50 for the year.
• We’ll send you reminders and payment instructions each quarter when the NIC is due.
• Total tax cost to the company: £1,135.50.
For Companies with Two or More Directors/Employees (Eligible for Employment Allowance):
• This salary level is usually fully covered by the Employment Allowance (£10,500 for 2025/26).
• Result: £0 Employer’s NIC to pay.
• This is generally the best option for multi-director companies.
Option 2 – Simpler Admin, Less Tax Efficient
Monthly Salary: £416 (Annual Salary: £4,992)
Key considerations:
• No Employer’s or Employee’s NIC is due — so there’s no NIC administration.
• However, drawing additional funds via dividends to reach £12,570 total results in a higher overall tax cost (approx. £1,777.55, vs £1,135.50 with Option 1).
• This salary is below the Lower Earnings Limit (£6,500), so it does not count as a qualifying year for your State Pension.
In most cases, Option 1 offers better value, even with the additional NI
Once your annual salary has been selected, what you need to do is to make sure that each month end the exact amount of salary is paid from your company account to your personal bank account. It is really important that this happens at month end, and not at any other date, to ensure that you stay within the RTI filing requirements. To make things simple we suggest you set-up a standing order payment from your business bank account to make your monthly salary payment automatically.
Expense Reimbursements
When you incur an expense that is wholly and exclusively for the purpose of your business, but you pay for the expense personally, your company can reimburse you for that expense.
The total amount of expenses that have not been reimbursed to you, can be found on your my ‘Take home payments’ page. And you can make an expense reimbursement to yourself weekly, monthly or at any preferred interval.
What you need to do is to make a payment to yourself for the amount owing, with a description ‘Expense Reimbursement’. Expense reimbursements are not considered to be part of your personal earnings, as the company is simply reimbursing you for an expense that you have already incurred.
Dividends
Dividends are how companies distribute profits to shareholders. As long as the company is in profit, it can declare a dividend at any time.
When you want to pay yourself a dividend, all you need to do is check the company’s retained earnings to ensure that there is sufficient profit to pay you out a dividend, and then make a payment to yourself with a description ‘Dividend’.
From April 2024 there is a new £500 tax-free dividend allowance for all taxpayers. You’ll pay tax on any dividends you receive over £500 at the following rates:
·8.75% on dividend income within the basic rate band
·33.75% on dividend income within the higher rate band
·39.35% on dividend income within the additional rate band
Loans
The final way of extracting funds from your limited company is as a director’s loan. This is not classified to be part of your earnings, because the funds are considered to be owing to the company, and will need to be repaid at some point.
For further information on taking a directors loan, please see the additional guidance on this.
Tracking your personal earnings and taxes
It is important to keep track of your personal earnings and payments, to make sure that you don’t end up with an unexpected tax bill, illegal dividend payment or overpaid expense reimbursement.
We have developed an easy way for you to do this, all you need to do is record the payment, each time one is made, on your my ‘Take home payments’ page. Payments are recorded in ‘new take home payment’ section.
If your total gross earnings exceed the basic earnings threshold and dividend allowance, the ‘personal tax’ page will update to show you the approximate personal tax due on your earnings. Please note, this is an approximation only and the actual tax owing will depend on the total of all personal earnings received in the tax year.
NOTE: Incurring the dividend tax is still more tax effective than increasing your annual salary (and incurring PAYE and NIC payments). This dividend tax is assessed when you prepare your personal self-assessment tax return.