How To Pay Yourself From a Limited Company

You are entitled to various benefits and perks as a limited company director. One of the most valuable is being in charge of your own salary, within certain limits, alongside other tax-efficient options. Knowing how to actually pay yourself can be confusing if you're unfamiliar with the process, so this article reviews the two major options and helps you decide which fits your situation.

Key Takeaways

• A limited company is a separate legal entity, so any income it generates belongs to the business, not you personally, until it's officially distributed.
• PAYE lets you draw a regular salary, which counts as a deductible business expense and builds your National Insurance record.
• Dividends are paid from company profits after tax, and don't attract National Insurance, but they can only be issued if there's sufficient retained profit.
• Many directors combine a small salary up to the National Insurance threshold with dividends on top, to reduce overall tax liability.
• Board meetings and dividend vouchers are required for every distribution, even if you're the sole director, to keep your records compliant.

How to Pay Yourself Through PAYE

PAYE, also known as Real Time Information (RTI), is the system most employees are familiar with. As director, you pay yourself a salary through payroll, taxed at the appropriate rate with National Insurance deducted.

Advantages:

• Regular income taxed correctly as you go
• Builds your state pension record
• Can include company pension contributions
• No extra personal tax return to complete
• No late payment penalties to worry about

Disadvantages:

• Less tax-efficient than dividends in many cases
• How much you can draw is limited by company cash flow
• Higher-rate taxpayers can't use their allowance as fully
• Requires reporting on or before each payday, less flexible than other methods

You'll need to register for PAYE before your first payday if your earnings exceed the relevant threshold. If you pay yourself below £5,000 a year with no other employees earning above this, you may not need to formally register as an employer, though it's worth confirming your specific position with an accountant.

How to Pay Yourself Through Dividends

Dividends are a distribution of company profits, and can be an efficient way to take money out, particularly for higher-rate taxpayers. This assumes you hold shares in the company and it has sufficient profit available.

If you also have a separate job paying you through PAYE, dividends are often the more popular route for director income, since they don't attract National Insurance and are usually taxed at a lower rate than your marginal income tax rate.

Advantages:

• More tax-efficient way to take money out
• Flexible timing, take them when it suits you
• Cheaper than salary, especially for higher-rate taxpayers

Disadvantages:

• Requires sufficient company profit to be available
• Specific paperwork needed to show HMRC the dividend was properly declared
• Only available if you're a shareholder

Can I Combine Both Methods?

Yes, and many directors do exactly this: a small salary through PAYE, topped up with dividends. This can reduce your overall tax bill while still building your state pension through the PAYE portion. Talk to an accountant if you're unsure which balance suits your circumstances, since the right mix depends on your specific profit and personal tax position.

Our VAT and PAYE registration support can help if you're setting either up for the first time.

FAQs

What's the most tax-efficient way to pay myself from a limited company?

Usually a small salary combined with dividends. Keeping your salary at a specific level can minimise National Insurance while still qualifying for the state pension, with dividends making up the rest at a generally lower tax rate.

How do I register for PAYE as a company director?

Online through HMRC, before your first payday. As a director, you're technically an employee of your own company, so it needs to be registered as an employer to report your earnings.

Can I pay myself dividends if my company isn't making a profit?

No. Dividends can only be paid from sufficient retained profit after Corporation Tax. Issuing one without enough profit is an illegal dividend, which carries real tax and personal liability risk.

What's the difference between a director's salary and a dividend?

A salary is taxed through PAYE and counts as a deductible business expense. A dividend is a distribution of post-tax profit, doesn't attract National Insurance, but can't be used to reduce your Corporation Tax bill.

Do I need paperwork every time I pay myself a dividend?

Yes, even as a sole director. You need board meeting minutes declaring the dividend, and a dividend voucher for each shareholder showing the date, company name, and amount paid.

What happens if I take money out without using PAYE or dividends?

It's usually recorded as a director's loan. If it isn't repaid within nine months of your company's year-end, the company may owe additional tax, known as S455 tax, so it's best to route withdrawals through proper payroll or dividends instead.

This article is intended to provide general information only. It shouldn't be taken as legal, tax, or professional advice. We always recommend speaking to a qualified accountant before making decisions based on the information here.