How to Pay Yourself as a Director

As a director of a UK private limited company , you are both an officer of the company and (if you draw a salary) an employee for payroll purposes. How you pay yourself affects your personal tax, the company’s corporation tax bill and your entitlements to state benefits.

Methods of Payment

Directors typically use a combination of salary and dividends to extract profits from the company:

Setting a Tax-Efficient Salary

Many owner-directors set their salary at a level that maximises tax efficiency. The best amount depends on other income, eligibility for Employment Allowance and the company’s Corporation Tax rate. The figures below use 2026–27 thresholds.

Strategy 1: NIC Primary Threshold (£12,570)

This is the most common approach. The salary uses the full Personal Allowance, no employee NIC is payable, and the salary plus employer NIC is deductible against corporation tax .

Strategy 2: Lower Earnings Limit (£6,708)

This is the lowest annual salary that normally records a qualifying National Insurance year in 2026–27. A salary no higher than the £5,000 secondary threshold avoids employer NIC, but does not by itself reach the £6,708 Lower Earnings Limit.

Strategy 3: Above the Personal Allowance

Paying a salary above £12,570 triggers income tax and employee NIC, which is rarely tax-efficient when dividends are available at lower rates. However, a higher salary may be worthwhile if the director needs to:

• Build up pension contributions based on earnings
• Demonstrate income for a mortgage application
• Qualify for higher statutory pay entitlements

Paying Dividends

After salary, the most tax-efficient way for owner-directors to extract company profits is through dividends.

Dividend tax rates for 2026–27

Dividend Requirements

Dividends can only be paid from distributable profits (accumulated realised profits minus accumulated realised losses). The company must:

• Have sufficient retained earnings in the accounts
• Prepare interim accounts or rely on the latest filed accounts to confirm distributable reserves
• Declare the dividend by board resolution (interim dividend) or shareholder resolution (final dividend)
• Record the dividend in the minutes

Paying dividends that exceed distributable profits is illegal and the director may be personally liable to repay them.

Combining salary and dividends

A reliable comparison must calculate employer NIC, Corporation Tax and personal dividend tax in that order. It must also use the company’s actual marginal Corporation Tax rate and account for other income, associated companies, Employment Allowance eligibility and available distributable reserves. A fixed worked answer can therefore be misleading when used outside its assumptions.

Director PAYE Obligations

Even if the salary is low, the company must run PAYE payroll for director salaries:

• Register as an employer with HMRC (if not already registered)
• Submit Full Payment Submissions through RTI each time the director is paid
• Calculate and deduct income tax and NICs using the annual earnings period method (directors use a cumulative annual calculation rather than weekly/monthly)
• Issue a P60 at year-end
• Provide payslips

Director NIC Calculation

Directors’ NICs are calculated on an annual basis (the annual earnings period), not a monthly basis like other employees. This means:

• NICs are recalculated cumulatively at each pay date
• The annual NIC thresholds apply to the year as a whole
• A director paid irregularly (e.g. a lump sum once a year) pays the same NIC as if paid monthly

Pension Contributions for Directors

Making employer pension contributions is highly tax-efficient for directors:

• No income tax or NIC on employer pension contributions
• Corporation tax deductible for the company
• Subject to the annual allowance (£60,000 for 2026/27)

A director earning £12,570 in salary could also receive up to £60,000 in employer pension contributions (subject to available company profits), effectively extracting up to £72,570 from the company with minimal tax.

Director Loans

Directors sometimes take loans from the company. Key rules:

Persistent director borrowing can be reclassified by HMRC as disguised remuneration, triggering income tax and NICs.

Accounting for Director Pay

Director remuneration creates entries in the company’s accounting records :

Director remuneration must be disclosed separately in the company’s annual accounts filed at Companies House .

State Pension and Benefits

The salary level affects the director’s State Pension entitlement:

A salary of at least £6,708 normally records a qualifying year for 2026–27 without employee NIC being deducted, although employer NIC can still arise above the £5,000 secondary threshold.