The Salary and Dividend Strategy
Most limited company directors pay themselves a small salary and take the rest of their income as dividends. This works because dividends are not subject to National Insurance (saving up to 25.8% combined NI), and corporation tax on profits (19–25%) is lower than income tax for higher earners. From April 2025, employer NI rises to 15% and the secondary threshold drops to £5,000 — changing the optimal salary calculation. Sole directors with no other employees (who cannot claim Employment Allowance) typically take £5,000 to stay below the employer NI threshold. Companies that qualify for Employment Allowance (£10,500 from 2025/26) can take £12,570 and use the allowance to cover employer NI. Take the rest as dividends.
"Most limited company directors pay themselves a small salary and take the rest of their income as dividends"
Corporation Tax
Your company pays Corporation Tax on its profits before distributing dividends. The main rate is 25% for profits over £250,000. The small profits rate is 19% for profits under £50,000. Between £50,000 and £250,000, marginal relief tapers the rate. Profits are reduced by your salary, employer NI, pension contributions, and allowable business expenses before tax is calculated. Your company must pay corporation tax within 9 months and 1 day of the accounting year end.
Dividend Tax
Dividends are taxed in your personal tax return. The first £500 is tax-free (2025/26 dividend allowance). Above this: basic rate taxpayers pay 8.75%, higher rate pays 33.75%, additional rate pays 39.35%. Crucially, dividends do not count as earnings for NI purposes. A director taking £50,270 total income (£12,570 salary + £37,700 dividends) pays significantly less tax than an employee on the same income.
Expenses You Can Claim
Your company can deduct genuine business expenses before paying corporation tax. These include: equipment and technology, business travel and mileage (not commuting), marketing and advertising, professional subscriptions, accountancy and legal fees, business insurance, training directly related to your trade, and a portion of home costs if you work from home. Keep receipts for everything. HMRC scrutinises director expenses carefully.
"Your company can deduct genuine business expenses before paying corporation tax"
Director Pension Contributions
Company pension contributions are one of the most tax-efficient ways to extract money from your company. The company pays into your pension directly — these are a deductible business expense, reducing corporation tax. There is no employer NI on pension contributions. A £10,000 company pension contribution effectively costs the company £8,100 after 19% corporation tax relief. The money enters your pension free of income tax and NI.
The Personal Service Company and IR35
If you provide services to clients through your limited company, HMRC may decide you are caught by IR35 — meaning they treat your income as employment income and apply PAYE tax and NI. The key tests are substitution (can someone else do your work?), control (does the client control how you work?), and mutuality of obligation (are you obliged to accept work?). In the public sector and large private companies, your client determines your IR35 status. Use the HMRC CEST tool and consider professional advice.
Extracting Retained Profits
Money left in the company after corporation tax is retained profit. You can leave it to grow (useful as a buffer), pay it as dividends over future tax years to spread the personal tax, make employer pension contributions, or invest it through the company. Be aware: if HMRC considers profits are being retained purely to avoid income tax, they may apply the close company rules. Take advice if you are accumulating large retained profits.
"Money left in the company after corporation tax is retained profit"
When a Limited Company Is Not Worth It
Running a limited company has costs: accountancy fees (typically £1,000–£3,000/year), Companies House filing requirements, more complex bookkeeping, and director legal responsibilities. The tax savings are most significant above roughly £30,000–£35,000 profit. Below this, the administrative burden may outweigh the benefits compared to sole trader status. Compare both structures with an accountant before deciding.
Director loans above £10,000 that are not repaid within 9 months of the company's year end trigger a 32.5% Section 455 tax charge. Mixing personal and company finances is the most common cause of costly mistakes for small company directors.
Finance Motion — General guidance only.
Not regulated financial advice.