If you run your own limited company, one of the first practical questions is how to pay yourself as a limited company director — and the answer is more nuanced now than it was even two or three years ago. The classic approach (tiny salary, rest as dividends) still has merit for many people, but the rates have shifted enough that it warrants a proper look rather than following the same formula everyone used in 2019.

As a director, you have four options for extracting money from your company: salary, dividends, expenses and benefits, and directors’ loans. In practice, almost every owner-managed limited company uses a combination of the first two. The question is the right ratio for your specific situation — your profit level, whether you have other income, whether you’re the only director, and what the company can actually afford to pay out.

We’ll run through each method, flag what’s changed for 2026/27, and give you a clear sense of where the standard advice still holds and where it needs updating.

A limited company can pay its director through salary, dividends, expenses and benefits, or a director’s loan. Each works differently and carries a different tax treatment — both for you personally and for the company.

Salary is paid through payroll. The company deducts Income Tax and employee National Insurance before paying you, and it also pays employer NI on top. Salary is a deductible business expense, which reduces Corporation Tax — that’s the key trade-off against dividends.

Dividends are a share of company profits distributed to shareholders. They can only be paid when the company has made a profit, and they are not deductible for Corporation Tax purposes. The tax you pay personally on dividends is lower than on salary, which is why the combination has historically been attractive. But for each dividend payment to be valid, you need to hold a board meeting (even if you’re the only director), keep minutes, and issue a dividend voucher showing the date, company name, shareholder names, and amount. This isn’t box-ticking — if HMRC ever queries your returns, this paperwork matters.

Expenses and benefits can cover legitimate business costs like mileage, home office use, or a company mobile. These are worth claiming properly, but they’re not a pay mechanism in the same sense.

Directors’ loans allow you to borrow money from the company, but this has its own tax rules and is not a substitute for salary or dividends — we cover this separately in our guide to director’s loan accounts.

For 2026/27, three salary levels come up most often in practice.

The first is around £5,000 — below the secondary NI threshold, which means no employer National Insurance liability for the company. It’s administratively simple and costs nothing in NI. The downside is that it’s well below the Lower Earnings Limit, so it doesn’t count as a qualifying year for State Pension purposes.

The second option is roughly £6,708 — the Lower Earnings Limit. You don’t pay NI at this level, but you do get a qualifying State Pension year. For directors who are some way from retirement, this is worth considering.

The third, and most commonly recommended for sole directors in 2026/27, is £12,570 — equal to the personal allowance. At this level, there’s no Income Tax and no employee NI because the rate doesn’t kick in until you breach the personal allowance. The company does owe employer NI on salary above the secondary threshold of £5,000, but for a sole director with no other employees, the Employment Allowance is not available, so that cost falls entirely on the company. The Corporation Tax saving on the deductible salary partially offsets it.

The analysis consistently shows that for most sole directors, £12,570 comes out ahead — but the margin is not enormous. At an £80,000 company profit level, the difference between a £5,000 salary and a £12,570 salary is a few hundred pounds in the director’s pocket after everything is accounted for. It’s worth getting right, but it’s not the kind of decision that will make or break the business.

From 6 April 2026, dividend tax rates increased across all bands. The basic rate rose from 8.75% to 10.75%, the higher rate from 33.75% to 35.75%, and the additional rate remains at 39.35%. These are not dramatic increases, but they do shift the maths — particularly at higher profit levels where more income falls into the higher band.

The dividend allowance stays at £500 for 2026/27. That means the first £500 of dividend income each year is free of tax, on top of any unused personal allowance.

In practice, for a director taking a £12,570 salary and then drawing dividends, the personal allowance is fully used by the salary. Any dividends then benefit from the £500 allowance first, then get taxed at 10.75% in the basic rate band up to £50,270, and at 35.75% on anything above that.

Dividends exceeding both the unused personal allowance and the £500 dividend allowance need to be reported to HMRC via Self Assessment. If you’re a director and you’re not already completing a Self Assessment return, that conversation needs to happen before you start drawing significant dividends.

One thing worth saying plainly: dividend income is added to your other income when working out which tax band applies. If you have other employment income, rental income, or interest, it all stacks — and can push more of your dividends into the higher rate than you might expect.

The salary-plus-dividends approach has been the default for owner-managed companies for years, and for most sole directors with modest profits it still makes sense. But there are situations where the formula doesn’t hold as cleanly.

If your company has two directors who are both shareholders, the Employment Allowance becomes available — meaning the company can offset up to £10,500 of employer NI per year. This changes the numbers significantly. At higher profit levels, a salary closer to the basic rate threshold can outperform the traditional minimal-salary approach once you factor in the Corporation Tax saving, the NI offset from the Employment Allowance, and the lower overall dividend exposure.

There’s also a shift happening around dividends and Self Assessment reporting. From 2025/26 onwards, dividend reporting through Self Assessment has become more visible, and some directors are moving away from heavy dividend extraction as a result — not because it’s wrong, but because they want a simpler picture and cleaner records.

We’re also seeing more directors in marginal Corporation Tax territory (where the marginal rate is 26.5% rather than 19%) where the deductibility of salary carries more weight than it did when the small profits rate was universal. At that rate, paying a higher salary reduces the Corporation Tax bill by more — which changes the optimal split.

The point is that the right answer varies by situation, and the assumptions behind the default advice are worth checking at least once a year.