How do I pay myself if I’m a limited company director?

Being the director of a limited company comes with many rewards, one of which is being in charge of your salary. But how exactly do you pay yourself as a company director? 

Key Takeaways

• Paying yourself as a director can be done via salary through the HMRC PAYE system or by taking dividends, each method serving different tax and cash-flow needs.
• Drawing a salary gives you regular income, contributes to your National Insurance record and allows your company to deduct the salary as a business expense.
• Taking dividends allows you to access company profits after Corporation Tax, avoids National Insurance on the payment and can be more tax-efficient in many circumstances.
• The most suitable mix (salary + dividends) depends on your company’s profits, tax thresholds and your personal circumstances - you should plan rather than assume one size fits all.
• Whatever method you use you must follow the correct legal steps: register the company as an employer if paying a salary, declare dividends only when profits are available and keep accurate records (such as meeting minutes and dividend vouchers).

How Does PAYE Work for Limited Company Directors?

Also referred to as Real Time Information (RTI), PAYE is a scheme run by HMRC to collect National Insurance Contributions (NICs) and Income Tax for all employees of a limited company, including the directors. To pay yourself and any other employees a salary, bonuses or expenses, you will need to be registered. As the director, you will be registered as both the employer and employee.

Each time you wish to pay yourself a portion of your yearly salary, whether it’s monthly or weekly, you must send a PAYE return to HMRC detailing the total pay, tax and deductions. The NICs you pay will depend on your tax code and, as an employer, you will also pay employer’s Class 1 NICs.

Companies Made Simple offer a PAYE registration assistance service to ensure your application is correct and less likely to be delayed due to errors. See here for more information about this service:

PAYE Registration Assistance

What Are Dividends and How Do Directors Pay Themselves This Way?

Dividends are payments that can be made to shareholders, provided the company has made enough profit. You do not pay National Insurance Contributions on them but you will pay Income Tax, the amount of which depends on your overall taxable income. See here for current rates.

To issue a dividend to yourself (and any other shareholders – dividends must usually be paid to all shareholders of the company) you need to hold a director’s meeting to declare the dividend payment and keep minutes of the meeting. This is still a requirement even if you are the sole director or shareholder of the limited company.

For each dividend, a dividend voucher must be created, showing the date, company name, name of shareholder(s) being paid, the amount of the dividend to be paid and the amount of ‘dividend tax credit’, which is 10% of the dividend income.

Why Must Directors Use PAYE or Dividends Instead of Simply Taking Money Out?

Remember! A company limited by shares is its own entity, separate from the director(s). It has its own assets and liabilities and as a director you are in charge of managing the company. Any money the company makes belongs to the company and you must use the appropriate methods above to pay yourself (unlike a sole tradership).

We strongly recommend seeking the advice of an accountant if you have any questions regarding the above processes.

This article is intended to provide general information only. It shouldn’t be taken as legal, tax, or professional advice. While we do our best to ensure the information is correct and up to date, it should not be relied upon as a substitute for expert advice specific to your situation. We always recommend speaking to a qualified professional before making any decisions based on the information here. We accept no responsibility or liability for any loss or damage that may result from your reliance on the information provided in this article. Use of the information contained in this article is entirely at your own risk.

FAQs

How can I pay myself as a director of my limited company?

You can pay yourself through a salary using the PAYE system or by taking dividends from your company’s profits. A salary counts as employment income and includes National Insurance contributions, while dividends are paid from retained profits and usually attract lower tax rates.

When should I choose a salary rather than dividends for my director’s income?

You may prefer to take a salary if you want steady income, to build up your National Insurance record, or if your company hasn’t yet made enough profit to pay dividends. A salary also reduces your company’s Corporation Tax bill because it’s classed as a business expense.

When are dividends a suitable way to pay myself as a director?

Dividends are a good option once your company has made a profit after paying Corporation Tax. They are more tax-efficient than a salary, as they don’t attract National Insurance. However, dividends must only be paid from available profits, and proper records must be kept.

Can I use a mix of salary and dividends to pay myself as a director?

Yes, many directors take a combination of a small salary and dividends. This approach helps maintain National Insurance contributions while keeping overall tax liabilities lower. The right balance depends on your income needs, company profits and personal tax position.

What legal steps must I follow when paying myself as a director?

You must register your company as an employer with HMRC if paying a salary, deduct PAYE and National Insurance where required, and issue payslips. For dividends, hold a board meeting to declare them, create dividend vouchers, and record everything accurately in your company’s books.

What should I consider when deciding how much to pay myself?

Think about your company’s profits, cash flow, and future plans, as well as your personal tax thresholds. You’ll need to ensure your chosen pay structure is sustainable, tax-efficient, and compliant with HMRC rules on salaries and dividends.

Can I pay myself dividends if my company has made no profit?

No, you can’t. Dividends can only be paid from profits after Corporation Tax. If you take dividends without available profit, they may be considered illegal and could have serious tax and compliance implications.