You can pay yourself limited company profits through dividends if you are a shareholder, and receive a salary for your work. The appropriate mix will depend on the profits of the company, other income and National Insurance. When transferring funds, review the company's standing and your own tax statements and make sure the money is transferred in a proper manner.
A salary is payment for doing a job, and a dividend is a return on a share. Have their own rules and should be recorded individually.
A payroll is the procedure by which wages are distributed. The company makes the calculations for any Income Tax and National Insurance payable and notifies HMRC of the payment.
Dividends are based on the distributable profits available. If the company has a healthy bank balance, that is not sufficient proof that the company can pay them.
For instance, a business loan, VAT collected from customers or funds required for unpaid suppliers may be in the bank account. Those amounts are not necessarily profits for shareholders.
| Point to compare | Salary | Dividends |
|---|---|---|
| Reason for payment | Work performed for the company | Ownership of shares |
| Main restriction | Employment, payroll and company obligations | Sufficient distributable profits and relevant share rights |
| Personal deductions | Income Tax and employee National Insurance may apply | Dividend Income Tax may apply |
| Employer National Insurance | May apply | Does not ordinarily apply |
| Corporation Tax treatment | Qualifying remuneration is generally deductible | Not deductible |
| Supporting records | Payroll records and payslips | Dividend approval and vouchers |
Check current figures and any accumulated losses before declaration of dividend. Even in the case of sole director and shareholder, maintain approvals and dividend vouchers.
These differences are explained in the official guidance on extracting money from a limited company www.gov.uk.
Treat all payments as they deserve to be treated. The name of the bank on the reference does not contain 'dividend' automatically meets the requirements.
Both salary and dividends can be part of your personal tax liability, although they have different tax rates. The impact of other income on the result can be a great deal.
The Personal Allowance is the standard rate of £12,570 for 2026/27, but may be lowered depending on your circumstances. Income Tax may apply to salary in excess of the allowed allowance, as may National Insurance, which operates on a different basis.
Scottish Income Tax rates on salary are different to other parts of the UK. Dividend tax rates apply UK-wide.
Dividend income in excess of the allowances will be taxed at: 2026/27.
| Dividend tax band | Rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
The amount of the dividend is £500. Income that is paid as a dividend under that allowance is still included in what tax bands your income will be treated as being in.
Don't skip other income when estimating the bill. Other work, pensions, rental income, and other dividends may impact the calculation.
The current dividend tax rates and an example is outlined in HMRC's guidance on tax on dividends.
Don't forget the company's expenses, either. Personal Income Tax may not be earned from this salary, but the Employer's National Insurance may be payable.
Eligible employers could be able to reduce that cost by claiming Employment Allowance. A company with only one director, however, cannot say that that director is its only employee who is liable for employer Class 1 National Insurance. www.gov.uk
A worked example demonstrates how the payments interact, but this is not to say that it would be the best arrangement for any director. Company expenses and individual factors should be taken into account.
Assume a UK-resident director has:
Full £12,570 Personal Allowance.
No other income or taxable benefits.
A salary of £12,570.
Dividends of £20,000.
Sufficient company profits to support those dividends.
No student loan repayments or other relevant adjustments.
The director has been in office since the start of the tax year, and the company is not eligible for Employment Allowance.
| Item | Illustrative amount |
|---|---|
| Gross salary | £12,570 |
| Dividends received | £20,000 |
| Total personal income | £32,570 |
| Income Tax on salary | £0 |
| Employee National Insurance | £0 |
| Dividends covered by the dividend allowance | £500 |
| Dividends taxed at 10.75% | £19,500 |
| Dividend tax | £2,096.25 |
| Personal income after these taxes | £30,473.75 |
| Employer National Insurance, paid separately by the company | £1,135.50 |
Employer National Insurance here is 15% of £7,570, above the annual secondary threshold of £5,000. It is an expense of the company and not a loss for the director's dividend. www.gov.uk
Corporation Tax which arises on the determination of the Company's distributable profits, is not included in the example. It is therefore not enough of a basis to justify using this combination as an alternative to additional salary.
To make an honest comparison, begin with the same profit that the company is making prior to director compensation. Next, calculate company taxes, personal taxes and remaining money.
Our Corporation Tax guide for UK businesses provides background on the company side of that calculation.
Money owed between a director and the company outside their ordinary salary, dividend and expense repayments is held in a director’s loan account. Check its balance on a regular basis.
The company could have a credit balance if you had previously extended loans to the company. The return of the principal loan is typically not considered taxable income. Interest has its own treatment.
Withdrawals of funds without adequate salary, dividend or other explanation may result in a debt owed to the company. This results in an overdrawn director’s loan account.
If the loan is overpaid past the time limit, it may result in a company tax charge for the shareholder-director. Depending on the terms of the loan, there may also be benefit-in-kind issues for loans over £10,000; see www.gov.uk.
Avoid closing out an overdrawn account by calling it a dividend at the end of the year. The company must have enough funds for distribution and the necessary documents.
For instance, when the personal household bills are paid using the business account, it results in transactions which must be explained. If these are not reviewed, it is more difficult to determine the amount of debt owed by either party.
By having reliable bookkeeping support these movements can be kept in view before they are transformed into a problem at year end.
Find the value of the combined business and personal situation, and select a payment plan that is feasible for the business. The lowest personal tax figure does not necessarily result in the lowest overall cost.
Begin with the needs of the entire family. Decide how much you need to save for regular expenses, and add that to the amount you are putting aside for discretionary purchases.
Then, check on the expected profits of the company, tax liabilities, and cash reserves. A business can make profits before its customers pay, and affordability has to be a separate cash check.
A helpful director salary vs dividends review consists of five steps:
List your other income. Cover income from employment, pensions, income from property and investments.
Check available profits. Include current accounts and losses and allow for tax.
Calculate company costs. Add employer National Insurance and appropriate reliefs.
Calculate personal liabilities. Take dividend tax, payroll deductions and other applicable requirements into account.
Choose a review schedule. Review the figures periodically when there is a change in income, staffing or business performance.
Do not simply take another director's salary without verifying their assumptions. They may be able to receive relief which you can't get, or they may have already taken advantage of their personal allowance.
Plan Company and Personal taxes separately. If a dividend is received and taxes are not withheld, it's not necessarily the full amount available to spend.
Check the arrangement before uncharacteristically large withdrawals. A profitable month might have to last for several less profitable months, for the payment of equipment or for an upcoming tax payment.
Our business tax planning guide includes broader planning matters. Our company tax services can help you with the numbers behind your payment plans if you think you need it.
Are monthly dividend payments allowed?
Yes, if there are adequate distributable profits and appropriate approval and documentation. No matter how well they do, monthly payments must not automatically be withdrawn. Check figures frequently and keep dividend vouchers and ensure the company remains current on bills and tax obligations.
Is it possible to take dividends without salary?
Yes. Shareholders may have a claim for dividends even if they are not paid any salary, depending on the profits available and the rights to those profits. But dividends do not accrue a National Insurance contribution record. Before you think that a dividend-only arrangement would be right for you, think about your broader situation.
Can I use the company bank account to pay for my expenses?
No. A limited company has a different identity from its owners and its bank account is the company's account. The appropriate treatment for personal withdrawals is a salary, a legal dividend, reimbursing expenses or repayment of a loan. Write each transaction down, don't use the account as a savings account.
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|---|---|
| Corporation Tax guide for UK businesses | Existing blog: Corporation Tax UK: Rates & Filing Guide |
| bookkeeping support | Bookkeeping Service page |
| business tax planning guide | Tax Advice & Planning page |
| company tax services | Company Tax page |