Director salary and dividends: questions answered

How you pay yourself decides most of your personal tax bill. This hub covers the optimal salary, the dividend rules, what makes a dividend unlawful, and the director's loan rules that catch owner-managed companies out.

What is the most tax-efficient director's salary in 2026/27? A single director with no Employment Allowance usually takes a salary at the £5,000 secondary threshold, avoiding employer NIC entirely. A company with two or more employees claiming Employment Allowance usually takes £12,570, because the employer NIC is absorbed by the allowance.

Should I take salary or dividends from my limited company? For most owner-directors a small salary plus dividends wins. Salary is deductible from company profit but carries National Insurance; dividends carry no NIC but are paid from post-tax profit. The efficient mix is a salary to a threshold, then dividends.

How much can I pay myself in dividends tax free? The dividend allowance is £500, taxed at 0%. If your personal allowance of £12,570 is unused, dividends covered by it are also tax free, so a director with a £5,000 salary can receive around £8,070 of dividends before any dividend tax.

What are the dividend tax rates this year? After the £500 dividend allowance, dividends are taxed at 10.75% within the basic rate band, 35.75% in the higher rate band and 39.35% above the additional rate threshold. Dividends are treated as the top slice of your income.

Do I need to file a self assessment as a company director? Not automatically. HMRC no longer treats directorship alone as a reason to file. You must register if you take dividends above the allowance, have other untaxed income, or meet another criterion such as the high income child benefit charge.

What is an illegal dividend and what happens if I take one? An illegal or unlawful dividend is one paid when the company has insufficient distributable reserves. It is void under the Companies Act, usually repayable by the shareholder, and HMRC commonly recharacterises it as a director's loan or as salary.

Do I need board minutes and dividend vouchers for every dividend? Yes. Each interim dividend should be supported by a board minute recording the decision and the reserves available, plus a dividend voucher for every shareholder showing the company, date, shareholder, share class and amount.

What is a director's loan account and how does it work? A director's loan account records everything you take from or lend to the company that is not salary, dividend or expense reimbursement. In credit, the company owes you. Overdrawn, you owe the company, which triggers tax consequences.

What is the s455 tax charge on an overdrawn director's loan? A company pays s455 tax at 35.75% of any director's loan still outstanding nine months and one day after the accounting period ends. It is refundable once the loan is repaid, but only nine months after the end of the period in which repayment happens.

Can I charge my company rent for using my home? Yes. With a written licence at a commercial rate, the company deducts the rent against profit and you declare it as property income on your Self Assessment, offsetting the related household costs. Done properly it is usually tax neutral or better for you personally.

Can my company pay into my personal pension? Yes. An employer contribution to your personal or SIPP pension is normally deductible for corporation tax, carries no income tax or National Insurance, and is not restricted by your salary level, unlike personal contributions.

Can I employ my spouse through my limited company? Yes, provided your spouse does real work and the pay is commercially justifiable for that work. The salary is then deductible for corporation tax. Paying for work not done is not deductible and is routinely challenged.

Do I need to register for PAYE if I am the only director? You must register for PAYE if you pay a salary at or above the lower earnings limit, provide benefits, or already have another job or pension. If you take dividends only, or pay below those thresholds with no other income, registration may not be required.

Are directors entitled to the Employment Allowance? A company cannot claim the Employment Allowance if its only employee paid above the secondary threshold is a single director. With a second employee earning above that threshold, the claim becomes available.

Rates, thresholds and deadlines quoted here reflect the 2026/27 UK position and current Companies House and HMRC guidance. Check GOV.UK, or ask us, before relying on them for your own company.