Running a limited company gives you something employees never get: a choice about how you’re paid. Used well, that choice is one of the most tax-efficient tools you have. Used carelessly, it’s how directors end up with surprise tax bills and awkward conversations with HMRC. The mechanics below don’t change much from year to year – the numbers attached to them do, which is exactly why we haven’t printed any.
The two levers: salary and dividends
Most director pay is built from two parts. A salary is a company cost – it reduces the profit you pay Corporation Tax on, but it runs through PAYE and attracts Income Tax and National Insurance as it rises. Dividends come out of profit after Corporation Tax, and are generally taxed more lightly in your hands – but they only exist if the profit does.
The classic shape, and still the starting point for most owner-directors, is a modest salary pitched around the National Insurance threshold – enough to bank a qualifying year towards your State Pension without triggering meaningful NI – with the remainder of your income taken as dividends. Whether that exact shape is right for you depends on the year’s thresholds, your other income, and a handful of personal factors. That’s a conversation, not a template.
Dividends come from profit – real profit
This is the rule that catches people. A dividend is a distribution of accumulated, taxed profit. If the company made £10,000 before tax, Corporation Tax comes off first, and only what remains can lawfully be paid out. Drawing money the profit can’t support doesn’t make it a dividend – it makes it a director’s loan, and that comes with its own rules.
Well-kept books make this simple: you can see, month by month, what’s actually available to distribute. Guesswork makes it dangerous.
The admin that makes it legal
- Register the company for PAYE with HMRC before paying any salary.
- Run payroll properly – tax and NI calculated, payslips issued, and Real Time Information reported to HMRC on or before each payday.
- Pay your PAYE bill on time – ordinarily by the 22nd of the following month when paying electronically.
- At year-end: P60s for everyone on payroll, P11Ds where there are benefits or expenses to report, and a final submission to HMRC.
None of this is difficult. All of it is mandatory. In our partnerships, it simply happens – one straightforward director payroll is included in every METRON plan.
Director’s loans: here be dragons
Money drawn beyond salary and dividends is a director’s loan. Small, short-lived balances are normal business. But a loan still outstanding nine months after your year-end triggers an extra tax charge on the company, and a larger balance can create a taxable benefit in kind for you personally. If your drawings are routinely running ahead of your profits, that’s not a paperwork problem – it’s a pricing, profit or spending problem wearing paperwork’s clothes.
The Ledger is general guidance, not advice on your circumstances. Tax rates, thresholds and reliefs change – usually every April – so always confirm the current position before acting. If you’d like this applied to your business rather than in general, that’s exactly what we’re for.