How to Pay Yourself as a UK Director — A Plain-English Guide

As a UK company director, you have more flexibility in how you take money from your business than a sole trader or employee. You can pay yourself a salary, take dividends, make pension contributions, and claim legitimate expenses. Each method is taxed differently, and the most tax-efficient approach uses a combination of all four.

This guide explains each method clearly and sets out the most effective combination for 2025/26.

Method 1: Salary

A salary is paid through the company's PAYE payroll and is subject to income tax and National Insurance in the usual way. The company can also deduct the salary as a business expense, reducing its Corporation Tax bill.

For most directors, the optimal salary for 2025/26 is £12,570 — equal to the personal allowance. This means:

• No income tax on the salary
• No employee NIC (below the primary threshold of £12,570)
• A National Insurance credit, protecting your state pension entitlement
• The salary is fully deductible against the company's profits for Corporation Tax purposes

The downside is employer NIC of 15% on salary above £5,000 — so on a £12,570 salary, the company pays £1,135.50 in employer NIC. See our separate article on salary vs dividend planning for a full analysis.

Method 2: Dividends

Dividends are paid from the company's post-tax profits — that is, profits after Corporation Tax has been paid. They are not subject to National Insurance, which makes them attractive for taking profit above the salary level.

Current dividend tax rates for 2025/26:

Dividend Income	Tax Rate
First £500 (dividend allowance)	0%
Basic rate band (up to £50,270 total income)	8.75%
Higher rate band (£50,271 – £125,140)	33.75%
Additional rate (above £125,140)	39.35%

Method 3: Employer Pension Contributions

Employer pension contributions are one of the most tax-efficient ways for a company director to extract value from their company. They are:

• Fully deductible against Corporation Tax as a business expense
• Completely exempt from National Insurance (both employer and employee)
• Not subject to income tax when contributed (though income tax applies when the pension is drawn in retirement)

The annual allowance for pension contributions is £60,000 (or 100% of your earnings, whichever is lower) for 2025/26. Unused allowance from the previous three tax years can be carried forward.

For a director approaching the higher rate threshold, contributing to a pension rather than taking additional dividends can save significant tax — the company saves Corporation Tax on the contribution and you avoid the 33.75% dividend tax rate.

Method 4: Expenses and Benefits

Legitimate business expenses reimbursed by the company are not treated as income and are fully deductible. Common examples include:

• Business travel and mileage (at HMRC approved rates)
• Business mobile phone provided by the company
• Professional subscriptions and training relevant to the business
• Home office costs on an apportioned basis

Benefits in kind — such as a company car or private medical insurance provided through the company — are taxable on the director personally and must be reported to HMRC on a P11D form. They also attract Class 1A employer NIC.

The Most Tax-Efficient Combination for 2025/26

For most directors, the optimal approach is:

1. Salary of £12,570 — clears the personal allowance tax-free, earns an NI credit, and is deductible for Corporation Tax
2. Employer pension contribution — if you want to build a pension or reduce the company's profit, contribute before year-end
3. Dividends for the remainder — use the £500 dividend allowance first, then take dividends at the basic rate (8.75%) up to the higher rate threshold if possible
4. Expenses — claim all legitimate business expenses through the company to reduce the profit available for tax before calculating dividends