If you are the director of a limited company, deciding how to pay yourself is more than just a financial question – it affects your tax position, your reporting obligations, and your relationship with HMRC.
The most common question we hear from new company directors is: should I take a salary through payroll, or pay myself using dividends?
The answer is often a combination of both, but the right balance depends on your circumstances, your income, and how your business is structured.
Here is a breakdown of both options and what you need to consider.
Paying Yourself Through Payroll
Directors can be employees of their own company, which means you can take a salary through the PAYE system. This comes with a few key features:
- You are subject to Income Tax and National Insurance
- You receive a payslip and your income is reported to HMRC in real time
- Your salary is a business expense and reduces your Corporation Tax bill
Many directors choose to pay themselves a salary up to the National Insurance threshold. As of 2025, this is £12,570 per year. Staying below this threshold means you pay no employee or employer NICs, but you still qualify for certain state benefits like the State Pension.
Taking a small salary through payroll can also make mortgage applications and other financial checks more straightforward, as it provides a regular, traceable income.
Paying Yourself Through Dividends
Dividends are paid from the company’s profits after Corporation Tax has been deducted. They are not subject to National Insurance, which can make them more tax efficient than salary at higher income levels.
Some advantages of dividends:
- No NICs are payable
- The first £500 of dividend income (as of April 2025) is tax free
- Dividend tax rates are usually lower than PAYE for higher earners
However, dividends can only be paid when your company has sufficient post-tax profit. You must hold a directors’ meeting and record the dividend in minutes. Unlike salary, they are not guaranteed and do not count as business expenses.
Why Most Directors Use Both
A common approach is to take a modest salary through payroll, often just under the NIC threshold, and then draw additional income through dividends. This strategy keeps you compliant, protects your entitlement to state benefits, and helps minimise your overall tax bill.
But it must be done correctly. Paying dividends when there are no retained profits can lead to issues with HMRC. And setting your salary too low or high can affect tax efficiency or pension contributions.
Get the Balance Right
At Lucas White Payroll Services Ltd, we work closely with directors and their accountants to ensure PAYE is set up correctly, tax codes are accurate, and payments are processed properly. We also support directors who want to change their payroll structure or are unsure about how much to take as salary.
It is about more than just ticking boxes. It is about making sure your pay works for your business and supports your goals.
Need Help Setting Up Director Payroll?
If you are a new director, or want to review how you currently pay yourself, we are here to help. We can run the numbers, ensure HMRC submissions are correct, and support you with tailored advice that fits your situation.
Book a free consultation to speak with our team about your director payroll and dividend strategy.
