If you run your own limited company, one of the biggest recurring decisions you face is how to take money out of it. The two main routes — salary and dividends — are taxed very differently, and the right mix can be the difference between keeping more of what your company earns and handing HMRC more than you need to.
This is a practical overview for the 2026/27 tax year. It is general guidance rather than personal advice — the right answer depends on your profits, your other income and what you want the money to do — but it should help you understand the moving parts and ask the right questions.
The Two Routes — and Why They Differ
Salary and dividends are not just two labels for the same thing. They sit in completely different parts of the tax system:
| Feature | Salary | Dividends |
|---|---|---|
| Company tax bill | Counts as a business cost, so it lowers the company's profit and the tax it pays on that profit | Paid from the profit that's left after the company has paid its tax, so it doesn't lower the bill |
| National Insurance | Once your salary passes certain levels, both you and the company pay National Insurance on it | No National Insurance to pay at all |
| Your own tax rates | Taxed at the normal income tax rates (20% / 40% / 45%) | Taxed at lower rates (10.75% / 35.75% / 39.35% in 2026/27) |
| State pension | A salary at the right level keeps building your state pension and counts towards things like maternity pay | Doesn't count towards your state pension or benefits like maternity pay |
| When you can pay it | Any time, like any wage | Only when the company has enough profit saved up to cover it — and with the right paperwork |
What this usually looks like in practice: for many small companies the efficient answer is a modest salary plus dividends on top. The salary keeps the company's tax bill down and protects your state pension, while the dividends top up your income more cheaply than simply paying yourself a bigger wage. Getting the balance right is where the real saving is — and it's worth a fresh look every tax year.
The One-Person Company Trap
The Employment Allowance is a scheme that lets most small companies knock up to £10,500 off the National Insurance their company pays as an employer in 2026/27. It's well worth having — but there's a catch that trips up a huge number of one-person companies.
A company can't claim it if the only person on the payroll earning a meaningful wage is a single director. In other words, if it's just you taking a salary, your company is shut out of the allowance completely.
This bites harder than it used to. The company now starts paying employer's National Insurance — at 15% — on any salary above just £5,000 a year. So if you pay yourself a salary up to around £12,570 (the point where your own income tax would start), the company pays that 15% on everything above £5,000, with nothing to cancel it out. That cost needs weighing against the tax the salary saves the company elsewhere.
How the Sole-Director Issue Is Resolved
There are a few legitimate ways to deal with it, depending on your situation:
-
Put a second person on the payroll
If a second employee — often a spouse or family member who genuinely works in the business — is paid more than £5,000 a year, the company can claim the Employment Allowance again, which then cancels out the employer's National Insurance on the wages. The job and the pay have to be real, though: HMRC can challenge wages paid to family that don't match actual work done.
-
Make a second person a director
A company with two directors, both paid more than £5,000, also qualifies. For couples running a business together this is often the natural answer — but the same rule applies: the second person needs a genuine role and pay that makes sense.
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If it really is just you
You accept there's no Employment Allowance, and the job becomes picking a salary that balances the tax it saves against the National Insurance it costs. It's also worth not setting the salary too low: pay yourself at least a certain minimum each year and you still earn a qualifying year towards your state pension, even if no National Insurance is actually due.
Worth saying plainly: putting a spouse on the payroll just to unlock the allowance can backfire if the role isn't real or the wage doesn't match the work. Done properly it's perfectly above board; done carelessly it's a risk. It's exactly the kind of thing worth a quick chat before you act.
Other Elements to Consider
- The tax on dividends has gone up. From 6 April 2026 the tax on dividends rose by two points, to 10.75% at the basic rate and 35.75% at the higher rate. That's narrowed the gap between salary and dividends, so a balance that worked last year may not be the best one now.
- You can only pay dividends from profit. A dividend has to be covered by profit the company has actually made and kept, and it needs a bit of paperwork to back it up. Pay one out when the profit isn't there and it's not allowed — the company can be made to take it back.
- Don't forget pensions. If you don't need all the cash right now, the company paying into your pension is one of the most tax-friendly ways to get money out — there's no National Insurance on it and it lowers the company's tax bill.
- Your other income matters. Dividends sit on top of your salary and anything else you earn, so it's your total income that decides the rate you pay. Tipping over £50,270 — or £100,000, where you start to lose your tax-free personal allowance — can change things a lot.
- It can affect other things too. How you pay yourself can have a knock-on effect on Child Benefit, student loan repayments, and even your mortgage — many lenders look mainly at your salary.
- Be careful taking money out informally. Dipping into the company account and squaring it up later can land you with extra tax charges. Keeping it clean and deliberate avoids unpleasant surprises.
- Timing helps. Spreading dividends across two tax years can make better use of your allowances and keep more of your income in the lower brackets.
Pay yourself the smart way
The best way to take money out of your company is rarely the same two years running, and the Employment Allowance alone can be worth thousands. As your ICAEW Chartered Accountant, here is how I can help:
- A pay-yourself review — work out the right mix of salary and dividends for you this year
- Employment Allowance — check whether you can claim it, and set things up so you can where it makes sense
- Payroll & dividends — run your payroll and sort all the paperwork that goes with it
- Pensions & the bigger picture — factor in pension contributions and your other income to keep more in your pocket
- Plain English — no jargon, just a clear answer on what to pay yourself and why
This post is intended as general guidance only and reflects rates and thresholds for the 2026/27 tax year. Always seek specific advice tailored to your own circumstances and refer to the latest HMRC guidance.