How do I pay myself from a limited company?

As a new or prospective director and shareholder, one of the questions you may be asking yourself is: “‘How do I pay myself from a limited company?” While not as straightforward as it is for sole traders, there are more options for tax efficiency and planning when paying yourself through a limited company.

Many company owners take a director’s salary through PAYE, just like an employee, and draw dividends on their shareholdings when the company makes a profit. Using a combination of salary and dividends offers flexibility and an opportunity to minimise your personal tax liability.

Furthermore, directors’ loans and various employee expenses are available, all of which can contribute to an overall ‘package’ of benefits. This post will discuss these options for paying yourself from a limited company.

Taking a director’s salary from a limited company

It is common for limited company owners to be directors as well as employees. Like any other employee, directors can take a regular monthly salary through HMRC’s Pay As You Earn (PAYE) system. You need to operate PAYE as part of your payroll.

Salaries and wages are classed as allowable business expenses. This means paying yourself a director’s salary will reduce your company’s taxable profits and Corporation Tax liability.

However, taking a high salary can be less tax-efficient than drawing dividends or combining both. We discuss this in more detail below.

Registering for PAYE

If you intend to pay yourself a salary or hire staff, you must register your company as an employer with HM Revenue and Customs (HMRC). PAYE registration should occur before the first payday but not more than two months in advance.

Limited companies (with between one and nine directors) can register for PAYE online. At Rapid Formations, we include PAYE registration in our All Inclusive Package. This registration can also be added to our other company formation packages as an additional service on the checkout page.

What taxes will I pay on a director’s salary?

Like any other employee, salaried directors are taxed ‘at source’ through the PAYE system. Your salary will be liable to Income Tax, employee Class 1 National Insurance contributions (NICs), and any other necessary deductions (e.g. Student Loan repayments).

The company will also pay employer (secondary) Class 1 NICs on salary earnings above £9,100 per year (£758 per month).

See also: Business tax guide for 2024-25 See also: What is PAYE? See also: Do I need to register for Self Assessment after I set up a company?

For tax efficiency, some directors limit their salaries to the NIC Primary Threshold and tax-free Personal Allowance (both of which are £12,570 for the 2024/25 tax year) and then draw further payments via dividends.

You can view the latest National Insurance rates for employees and employers online, as well as Income Tax rates (England, Wales, and Northern Ireland) and Scottish Income Tax rates for the 2024/25 tax year.

Drawing dividends from a limited company

Many small companies have a sole director and shareholder who owns and controls the entire company. This is also common in companies with two or more owners, where each person is a director and a shareholder.

In these scenarios, taking dividends on top of a small director’s salary is usually more tax-efficient than paying yourself only a salary through PAYE. This combination is the most effective in terms of minimising taxation.

What is a dividend?

A dividend is a payment made to company shareholders from distributable business profits. Typically, dividends are paid to all eligible shareholders based on the proportion of shares they hold.

For example, if you hold all of the shares, you’re entitled to all distributable profits; or where two people hold 50% of the shares, both shareholders are entitled to 50% of the profit.

How are dividends paid out?

Directors must declare dividends at a board meeting based on the profit available for distribution. Meeting minutes must be retained to record the decision, even in a sole director company.

In respect of each dividend payment, the directors must create a dividend voucher with the following details:

• the company name
• date of dividend payment
• names of shareholder(s) receiving a dividend
• the total amount of dividend being paid out

Copies of the vouchers must be given to each dividend recipient and also retained for the company’s records.

What tax will I pay on dividend payments?

Dividends are distributed from company profits after Corporation Tax. Therefore, unlike salaries, they are not business expenses and cannot be deducted from the company’s Corporation Tax liability.

Shareholders who receive dividend payments are liable to pay tax on any dividend income above £500 (the tax-free allowance for 2024/25) and their Personal Allowance. They do not pay Income Tax or NICs on dividend earnings.

The tax rates that apply to dividend payments are lower than Income Tax rates on salary payments. However, they are based on the individual’s Income Tax bracket:

Salary:          20% (basic rate)        40% (higher rate)        45% (additional rate)

Dividend:      8.75% (basic)            33.75% (higher)           39.35% (additional)

The rates of tax on dividends are lower to account for the Corporation Tax that companies pay on profits before distributing dividends to shareholders.

How much dividend income can I take?

There is no statutory limit on the amount of dividend income you can take from your company. Payments are based on the percentage of shares you hold and the rate of dividend declared by the directors or shareholders.

See also: How dividends work in a private limited company

However, since dividends are paid from company profits, the amount you can take will fluctuate depending on the company’s distributable profit at any given time.

If no profits are available, you cannot pay yourself dividends. Doing so would result in the payment of illegal dividends, which can have serious consequences.

Claiming expenses and benefits from a limited company

Some business owners will make substantial use of expenses and benefits in addition to taking a salary and dividends. There are many expenses and benefits you can claim as a company director, including but not limited to:

• Pension and retirement benefits schemes
• Computers and office equipment
• Training costs
• Company cars
• Fuel expenses and parking charges
• Medical insurance
• Travel expenses, meals and entertainment costs
• Childcare

Depending on the type of expense, different taxation and reporting rules apply. You can view the full list of expenses and benefits, along with the relevant tax rules and rates, at GOV.UK.

What tax will I pay on expenses?

Each type of expense or benefit is subject to a different amount of tax, and some are tax-free (e.g. certain childcare expenses*). Companies must report and pay taxes on employee benefits to HMRC through PAYE.

* The following forms of ’employer-provided childcare’ are exempt from tax and NICs and do not need to be shown on form P11D:

• places made available in a nursery provided by the employer
• other qualifying or directly contracted childcare up to the exempt amount for the employee
• childcare vouchers that can be exchanged for qualifying childcare up to the exempt amount

How to pay tax on expenses

You can pay tax on expenses every month through PAYE, alongside any payments due on salaries. Additionally, employers must send HMRC details of any expenses and benefits they provide to employees or company directors in the form of an end-of-year expenses and benefits report.

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Form P11D must be filed for each director or relevant employee who has received expenses or benefits. It can be filled in and submitted online. This must be done by 6 July following the end of each tax year.

Record keeping of expenses and benefits

Full records of any benefits and expenses paid to directors and employees must be retained for 3 years from the end of the tax year to which they relate.

HMRC may request that these records be viewed as part of an inspection. Records retained should include:

• date and details of every expense or benefit which has been provided
• any information needed to work out the amounts which appeared on end-of-year (P11D) forms
• any payment contributed by directors or employees to an expense or benefit

Any correspondence with HMRC concerning benefits and expenses should also be retained.

Directors’ loans

Unlike sole traders, whose personal and business finances are generally fluid and interchangeable, limited companies must follow strict processes when directors and shareholders withdraw money from the business.

A director’s loan is one method of making business funds available for personal use other than through salary, dividend payments, and expenses.

A director’s loan is not considered to be a payment in the same way as a salary or dividends. However, accurate records must be retained because director’s loans are subject to their own tax rules. These records are known as a ‘director’s loan account’.

What tax must be paid on directors’ loans?

At the end of each financial year, any money owed to the company as part of the director’s loan account must be included in the balance sheet as part of the annual accounts. Taxes that apply to director’s loans comprise:

• Section 455 Tax at 33.75%—if the loan is over £10,000 and is not repaid within 9 months of the end of the relevant Corporation Tax accounting period.
• Personal tax—if the director’s loan is over £10,000. Additional tax may be due if interest has been paid below the official rate.

What is a benefit in kind?

If a company director uses any asset belonging to the company for personal use, they are receiving a ‘benefit in kind’ and must declare it for tax purposes. Should a director’s loan account exceed £10,000, it will automatically be classed as a benefit in kind and must be reported on the director’s Self Assessment tax return.

Bed and breakfasting

Although Corporation Tax is generally payable on director’s loans, this can be avoided (through tax relief) if it is repaid within 9 months of the end of the relevant Corporation Tax accounting period. However, the amount still needs to be declared.

If a director’s loan is repaid within the 9 months but immediately taken out again, this is known as ‘bed and breakfasting’. HMRC will view this as an attempt to circumvent tax and deny tax relief in respect of any loans over £5,000 that are repaid and then taken out again within 30 days.

Thanks for reading

Please comment below if you have any questions about this post or want to speak to us about setting up a limited company. Our London-based team of company formation experts will be happy to help.

For more limited company guidance and small business advice, explore the Rapid Formations Blog.