One of the first practical questions new directors ask us is straightforward: how do I actually pay myself? The answer involves understanding how to pay yourself as a limited company director in a way that is both legal and reasonably tax-efficient. The short version is that most directors take a modest salary topped up with dividends. The longer version is that it requires careful thought about the numbers, and those numbers have changed.

From April 2026, dividend tax rates increased across the basic and higher rate bands. Employer National Insurance went up in April 2025. The dividend allowance has been cut to £500. Taken together, these changes have made the traditional low-salary, high-dividend approach less compelling than it once was, though for most owner-managers it still beats alternatives. We want to explain why, and where the calculation now sits.

A limited company is a separate legal entity from you as its director. Money sitting in the company is not yours to spend personally until the company pays it to you in a recognised form. The two main options for most owner-directors are a salary paid through PAYE and dividends paid from the company’s after-tax profits.

Salary is subject to income tax and National Insurance, both employee and employer. Dividends are paid from profit after corporation tax and attract dividend tax rather than National Insurance, which has historically made them more tax-efficient for extracting company income.

The reason directors do not simply take a high salary is that employer National Insurance adds a meaningful cost on top of every pound of salary above the secondary threshold. From April 2025, the employer NIC rate increased to 15%, so the combined cost of paying a salary rises more steeply than many directors expect.

Taking a low salary keeps those NIC costs down. A salary set at the personal allowance threshold (£12,570 for 2026/27) or at the secondary NIC threshold means the company pays little or no employer NIC, the director pays little or no income tax on the salary, and the salary is still a deductible expense against corporation tax. The remaining profit can then be distributed as dividends, taxed at the lower dividend rates.

The April 2026 changes are significant enough to warrant a proper review of any remuneration strategy put together before that date.

For the 2026/27 tax year, dividend tax rates above the £500 annual dividend allowance are:

• Basic rate band (income up to £37,700 above the personal allowance): 10.75%
• Higher rate band (£37,701 to £125,140): 35.75%
• Additional rate (above £125,140): 39.35%

The basic and higher rates each rose by 2 percentage points from April 2026. The additional rate stayed the same. The government’s stated rationale is to narrow the gap between tax paid on employment income and tax paid on income from assets, given that dividends do not attract National Insurance.

Two percentage points may not sound dramatic, but combined with the reduction of the dividend allowance from £2,000 (where it stood until April 2023) to £500, the cumulative effect over recent years is substantial. A director taking £30,000 in dividends in 2026/27 is paying meaningfully more tax on those dividends than the same director would have paid in 2022/23.

Dividend income falling within your personal allowance is still tax-free. And dividends from shares held in an ISA remain outside the scope of tax entirely, though for most owner-directors ISAs are not the primary vehicle for drawing company income.

The optimal salary for a director depends on several variables: whether the company can claim the Employment Allowance, how many directors the company has, whether you have other income, and whether you are in Scotland (where intermediate rate bands affect the calculation differently).

A commonly discussed approach is to set the salary at £12,570, which aligns with the personal allowance and means no income tax is due on the salary. If no Employment Allowance is available (for example, a single-director company where you are also the sole employee), you will pay employer NIC above the secondary threshold of £5,000, so some directors instead set their salary at £5,000 to avoid that cost entirely.

Where two directors are involved and the company qualifies for Employment Allowance (which offsets employer NIC up to £10,500), higher salaries can make sense. With the corporation tax marginal rate at 26.5% for profits in the taper range, a salary payment reduces profits subject to corporation tax, and if Employment Allowance covers the employer NIC, the net saving can outweigh the employee NIC and income tax cost. Each pound of salary paid saves corporation tax at the marginal rate, but costs employee NIC and income tax on the director’s side. Whether that trade works in your favour depends on your profit level and personal circumstances.

There is no universal right answer, which is why we tend to work through the numbers with each client rather than applying a standard formula.

From the 2025/26 tax year, directors of close companies (broadly, companies controlled by five or fewer shareholders, which includes the vast majority of owner-managed limited companies) must report dividends from their own company under the employment section of their Self Assessment tax return, rather than as general dividend income.

This requires the director to include the company’s name and registration number, and the percentage of share capital they own. The change is designed to give HMRC better visibility of director remuneration structures in owner-managed businesses.

It is a compliance change rather than a tax change, but it matters for two reasons. First, Self Assessment returns filed for 2025/26 onwards need to be completed differently from previous years, and using the wrong section could trigger an HMRC query. Second, some clients tell us they were previously unclear about whether their dividends needed to go on their tax return at all. They do. Dividend payments above both any unused personal allowance and the £500 dividend allowance must be reported to HMRC.

If you use an accountant to file your Self Assessment, they should handle this automatically. If you file yourself, make sure you are using the employment section for close company dividends from the 2025/26 return onward. We have seen clients who were not aware of the change, and it is the kind of thing that is much easier to get right first time than to correct after submission.

For more on what a director’s financial relationship with their company looks like, our guide on What Is a Director’s Loan Account? covers the related topic of money moving between you and your company outside of salary and dividends.