How to pay yourself as a UK business owner
Last month, our client in Sevenoaks called me in a panic. She’d just recently set up her limited company and had no idea how to actually pay herself. ‘Can I just transfer money whenever I need it, like I used to as a sole trader?’ she asked.
If only it were that simple!
How you pay yourself as a business owner makes a huge difference to your tax bill and your take-home pay. If you mess it up, you could end up paying thousands more in tax than you need to. But, once you understand the basics, it’s pretty straightforward to structure things properly.
Understanding how to pay yourself as a UK business owner
The way you pay yourself depends on your business structure. Sole traders and limited company directors play by completely different rules. Getting this wrong is one of the most expensive mistakes small business owners make. Sadly, we see this often, so it’s worth taking a few minutes to read the rest of the blog so you can avoid the same problem.
The difference between sole traders and limited company directors
If you’re a sole trader, your business income is your personal income. You simply withdraw what you need, when you need it. Come tax return time, you’ll pay Income Tax and National Insurance on your profits through Self-Assessment.
You are not the same as your limited company
Limited company directors have more flexibility but also more complexity. Your company is a separate legal entity, which means you can’t just help yourself to the money whenever you like because the money belongs to the company, not you. Instead, you have two main options: salary or dividends. Most directors will take a combination of both.
Paying yourself through salary
Taking a salary means you’re officially an employee of your own company. This might sound strange, but it comes with some important benefits for your National Insurance record and state pension.
Many company directors pay themselves a small salary – often up to £12,570 per year for 2025/26. This amount sits just below the threshold where you’d start paying tax and it’s enough to maintain your entitlement to state benefits.
Saving NI by taking a lower salary
A construction company director we work with in Dartford used to pay himself a salary of £25,000. By reducing this to £12,570 and taking the rest as dividends, he saved over £1,900 a year in National Insurance contributions (employer and employee) and reduced his income tax by over £2,400. He was ecstatic when we told him this.
Salaries are tax-deductible for your company, which reduces your Corporation Tax bill. However, you’ll need to run payroll, submit Real Time Information (RTI) to HMRC, and deal with PAYE even if you’re the only employee and you should factor that admin cost into any workings when you decide how to pay yourself as a UK business owner.
Taking dividends from your company
Dividends are payments from your company’s profits after Corporation Tax has been paid. The tax treatment is much more favourable than salary, which is why most directors use dividends as their main way to extract money from their business.
For 2025/26, you can take £500 in dividends completely tax-free. Beyond that, you’ll pay dividend tax at 8.75% as a basic rate taxpayer, 33.75% at higher rate, or 39.35% at additional rate. A marketing consultant we advise takes quarterly dividends rather than monthly ones. This approach works well for her because it gives her time to ensure the profits are there before making distributions.
What are illegal dividends?
Dividends can only be paid from available profits. You can’t just declare a dividend whenever you fancy – your company needs to have made enough profit to justify the payment. This is important because illegal dividends can create tax complications and personal liability for directors.
Combining salary and dividends
For many limited company directors, the most tax-efficient approach combines a small salary with dividend payments. This strategy takes advantage of the benefits of both methods while minimising overall tax.
Taking a salary up to the National Insurance threshold maintains your state pension entitlement without triggering NI payments. However, since 2025/26 the NICs threshold was dropped from £9,100 to £5,000, which is a very small salary. Many limited company directors will choose to take £12,570 which is the personal income tax allowance and pay some NI. Then, you top up your income with dividends, which are taxed at lower rates than salary and don’t attract National Insurance at all.
The exact split depends on your personal circumstances and total income needs. A retailer in Gravesend typically takes £12,570 salary and around £38,000 in dividends annually. This enables her to stay within the 20% tax bracket and the combination saves her several thousand per year compared to taking everything as salary.
Tax implications you need to understand
Every method of paying yourself has different tax consequences, and understanding these helps you make informed decisions rather than costly mistakes.
Sole traders pay Income Tax on all profits at your personal tax rates – 20% basic rate, 40% higher rate, or 45% additional rate. You’ll also pay Class 4 National Insurance as follows:
- Class 4 (Profits-based):
- £0 – £6,844: No NICs.
- £6,845 – £12,569: No Class 2 or Class 4 due, but NI record is protected.
- £12,570 – £50,270: 6% of profits.
- Over £50,270: 6% on profits up to £50,270 and 2% on profits above £50,270
Limited company directors benefit from the lower Corporation Tax rate of 19% on company profits up to £50,000. When you then take dividends, you’re effectively paying tax twice, once through Corporation Tax and again through dividend tax. However, the combined rate is still usually lower than Income Tax and National Insurance on an equivalent salary.
Practical considerations beyond tax
Tax efficiency matters, but it’s not the only consideration when deciding how to pay yourself.
Try to get a mortgage?
Mortgage lenders typically prefer regular salary income over dividends. If you’re planning to buy a house or remortgage, taking a higher salary for a year or two might make sense, even if it’s slightly less tax-efficient.
Do you have enough to live on?
Cash flow also plays a role. Dividends can only be paid from profits, so if your company is going through a lean period, you can’t just declare a dividend. Having some salary provides a guaranteed minimum income regardless of profitability.
What about saving for the future?
Pension contributions work differently depending on whether you take salary or dividends. Company pension contributions reduce your Corporation Tax bill, while personal contributions from dividend income don’t attract the same tax relief.
Getting the structure right for your situation
There’s no one-size-fits-all answer to how you should pay yourself. Nothing is ever that predictable. Your optimal structure depends on your profit levels, personal income needs, future plans, and whether you have business partners or other employees. What works perfectly for a one-person consultancy might be completely wrong for a growing retail business with staff.
Professional advice pays for itself many times over when it comes to remuneration planning. A proper review of your circumstances can identify thousands in potential savings, which could be far more than the cost of getting expert help.
Support for your decision on how to pay yourself
At Adams Accountancy, we help business owners across Kent structure their remuneration in the most tax-efficient way possible. Our friendly team can review your specific situation and explain your options in plain English – because no question is too silly when it comes to looking after your money properly.
Contact us today for a free, no-obligation chat about how you’re currently paying yourself. We’ll help you understand whether you could be doing things more efficiently – and potentially putting more money in your pocket each year. Call 01322 250001 or get in touch online to speak with our team.
Frequently asked questions
Can I change how I pay myself during the tax year?
Yes, you can adjust your remuneration strategy throughout the year as circumstances change. Many directors modify their salary-dividend split based on profitability, personal income needs, or changes in tax rates. However, any salary changes need proper documentation through payroll, and dividends can only be declared when profits allow. It’s sensible to plan your overall approach at the start of the tax year, but flexibility exists if your situation changes.
What happens if I take too much money as dividends?
Paying dividends beyond your available profits creates an illegal dividend situation. As a director, you could be personally liable to repay this money to the company. HMRC may also treat these payments as salary, creating unexpected tax and National Insurance bills. Always ensure your accountant confirms sufficient distributable profits before declaring dividends. Proper dividend paperwork including board minutes helps protect you if questions arise later.
Do I need to pay myself a salary if I’m the only director?
No legal requirement exists to pay yourself a salary as a company director. However, taking at least a small salary (typically around the National Insurance primary threshold of £12,570 for 2025/26) maintains your state pension entitlement. You can avoid NI payments by taking an even smaller salary of £5,000. You could rely entirely on dividends, but this means gaps in your National Insurance record that might affect future state pension. The administrative burden of running basic payroll is usually worth it for the pension protection.
How often can I take dividends from my limited company?
You can declare dividends as frequently as you like – monthly, quarterly, or annually – provided your company has sufficient distributable profits each time. Many directors take regular quarterly dividends for consistent income, while others prefer monthly payments similar to a salary. Each dividend requires proper paperwork including board minutes and dividend vouchers. The frequency matters less than ensuring profits genuinely exist before making each payment and maintaining correct documentation throughout. Make sure that you don’t overdistribute early in the year and end up with an illegal dividend at tax year end.
About the author
Michelle Adams is a qualified accountant and director at Adams Accountancy, specialising in helping small business owners across Kent optimise their tax position and remuneration strategies. With over 15 years of experience supporting limited companies, sole traders and partnerships, Michelle and her team make complex tax planning simple and accessible for busy business owners. For expert advice on how to pay yourself tax-efficiently, contact Adams Accountancy for a free consultation.