Salary or Dividends? How Directors Should Think About Paying Themselves

One of the most common questions we are asked by limited company directors is straightforward enough: should I take a salary, dividends, or a combination of both?

The honest answer is that there is no single correct approach. Tax efficiency matters, but the most effective way to extract funds from your company depends on a wide range of factors – your company’s profitability, your personal income, family circumstances, future plans and even practical considerations such as mortgage applications. What works well for one director could be entirely the wrong approach for another.

Why It Matters

As a limited company director, you have considerably more flexibility than a sole trader when it comes to how you receive income from your business. Funds are typically extracted through a combination of salary, dividends, pension contributions, director’s loan repayments and benefits in kind. Getting the balance right can make a meaningful difference to your overall tax position but tax should never be the only consideration.

Salary: The Foundation

Most directors take at least some salary through PAYE, and for good reason. Salary contributes to your National Insurance record, supports mortgage and lending applications, is a deductible expense for corporation tax purposes and provides regular, predictable income.

For the 2026/27 tax year, the Personal Allowance remains at £12,570 meaning most individuals can receive income up to this level before paying Income Tax. That said, salary can also trigger employee and employer National Insurance contributions depending on the level taken, which is why it is worth reviewing your salary position carefully each year rather than simply leaving it unchanged.

Dividends: A Commonly Used Option

Dividends are paid from company profits after corporation tax and, unlike salary, are not subject to National Insurance which is one reason they often form part of a director’s remuneration strategy.

For the 2026/27 tax year:

• Dividend Allowance: £500
• Basic rate dividend tax: 10.75%
• Higher rate dividend tax: 35.75%
• Additional rate dividend tax: 39.35%

Dividends can still be tax-efficient in many circumstances, though recent changes to dividend tax rates mean the gap between salary and dividends is not always as significant as it once was.

Why There Is No “Perfect” Salary

You may have seen articles suggesting a single optimal salary figure for directors. In practice, the right remuneration strategy is rarely that simple.

The most appropriate approach will depend on factors including your total personal income, any other employment, rental or investment income, pension contributions, your spouse’s income, company profitability and whether you wish to retain profits in the business or extract them personally.

A director taking £30,000 from their company will likely require a very different approach to one extracting £150,000. Someone prioritising a mortgage application may also make different decisions to someone focused primarily on minimising their tax liability.

Retaining Profits Can Sometimes Be the Right Decision

It is worth remembering that you do not always need to extract every pound of profit in the same tax year. In some circumstances, retaining funds within the company is more tax-efficient than withdrawing everything at once particularly if you expect lower personal income in future years, are planning business investment, intend to make pension contributions or are considering an eventual exit.

Don’t Overlook Pension Contributions

For many directors, employer pension contributions remain one of the most tax-efficient ways to extract value from a company. Company pension contributions can reduce your corporation tax liability while building long-term personal wealth and in some cases, increasing contributions can be more beneficial than taking additional dividends.

Review Your Approach Every Year

Tax rules, thresholds and personal circumstances change. A remuneration strategy that was right last year may not be the most effective option today, which is why we recommend reviewing your position annually rather than relying on a fixed formula or generic guidance.

Remuneration Planning with SHA

Deciding how to pay yourself as a director is rarely as straightforward as applying a single tax rate or following standard advice. The right approach depends on your company’s performance, your personal circumstances and your longer-term financial goals — and it can change significantly from one year to the next.

At SHA, we offer a dedicated Strategic Limited Company Remuneration Review. A service designed specifically to help limited company directors assess whether their current remuneration strategy remains appropriate and tax-efficient for their circumstances.

Rather than relying on a fixed formula or advice that was right at a different point in time, the review takes a structured look at your current position across salary, dividends, pension contributions and other extraction methods giving you a clearer picture and a strategy that genuinely reflects where you are today.

If you would like to find out more about our Strategic Limited Company Remuneration Review or discuss whether it would be appropriate for your circumstances, please get in touch with the team. We would be happy to help.