How limited company directors get paid: Salary vs dividends explained

Understanding how you’re paid when running your own limited company is a pretty important step, especially when it comes to maintaining tax efficiency and remaining compliant with HMRC. By ensuring you get the balance between salary and dividends correct you’re able to optimise your take-home pay whilst ensuring your company is meeting all its legal obligations. 

In this blog we explore the differences between a salary and dividends, how dividends are taxed, and what you need to be on the lookout for with Director’s Loan Accounts, including why careful planning for Corporation and personal tax is so important.  

• Salary and dividends aren’t taxed the same – it’s important to understand both to improve your tax efficiency  

• Dividends must be correctly documented, and can only be paid from available profits  

• Always ensure your Director’s Loan Account is balanced to avoid any additional and unwanted tax charges 

• Planning ahead is essential! Corporation Tax and personal self-assessment payments must be planned for 

• Speak to your Aardvark Client Director before withdrawing funds from your company, to ensure compliance and to avoid any issues further down the road 

Salary 

A salary is your employment income and is subject to Income Tax and National Insurance Contributions (NICs). It’s still payable even if your company hasn’t made a profit and can count towards your state pension and statutory benefits.  

As salaries are subject to both employer and employee NICs, most limited company directors decide to review their salary levels annually with their accountant to ensure they’re paying themselves efficiently. 

Dividends 

Dividends are payments shareholders make to themselves from their limited company’s post-tax company profits. Dividends aren’t subject to NICS and are usually taxed at lower rates then salaries, so this makes them an attractive choice for shareholders to distribute their company’s profits. 

To remain compliant you: 

• can only pay dividends if your company has sufficient retained profit 

• record each dividends declaration via your board meeting minutes 

• provide dividend vouchers to all the shareholders associated with your limited company (most cloud-based accounting software can do this for you) 

If you withdraw dividends when there isn’t sufficient profit within the company to do so, the dividends will not be allowable and will need to be reclassified as a Director’s Loan or alternatively HMRC may deem the funds as disguised salary. This may result in penalties or additional tax.  

hese are the current dividend tax thresholds for the 2026/27 tax year: 

It’s important to remember that: 

• Dividend tax is calculated based on the date of declaration, not on the date of its payment 

• For example – if you declare a dividend on 1st April 2027 but it was paid on 7th April 2027, this will count towards the 2026/27 tax year 

• Any tax due on dividends must be paid via your self-assessment by 31st January following the end of the tax year 

• Payments on Account may apply, which will require advanced payments towards the next tax year’s liability if your self-assessment tax bill exceeds £1,000 

• Dividends are taxed last. Therefore, if you have other sources of income such as employment, rental income, or a pension, these will first use up your basic rate band, and any dividends received will then be taxed according to the dividend tax rates applicable to the remaining tax bands. 

What is a Director’s Loan Account (DLA)? 

A DLA is a record of any transactions between yourself and your company which do not fall under the category of salary, dividends, or reimbursed expenses. Should you withdraw funds from your company that are more than what you’re owed, the account will become overdrawn and your company is therefore effectively lending you money. 

Easy mistakes to make 

• Declaring dividends without the sufficient profits to do so -this leads to illegal dividends 

• Poor documentation -if you fail to create minutes or dividend vouchers 

• Mixing withdrawals -confusing DLAs with dividends or reimbursed expenses 

• Ignoring or forgetting repayment deadlines – if you don’t clear an overdrawn DLA within 9 months of your company’s year-end, it can trigger a Section 455 tax charge (which is currently 35.75%) 

Corporation Tax 

As dividends are paid from your company’s post-tax profits, your company must pay Corporation Tax (CT) before any dividends can be distributed. CT is currently between 19% and 25% depending on your profit level). 

Personal Tax 

Dividends are paid gross, meaning that no tax is withheld, so therefore each shareholder must: 

• Calculate their own dividend tax liability 

• Ensure you’re setting enough money aside personally to cover the tax payable, as this is a personal tax 

• Pay the tax due through their self-assessment by 31st January following the tax year-end 

Avoiding cash flow shocks 

Sometimes when you’re new to running a company, tax bills can catch you off guard. The best way to avoid this is to: 

• Create a separate business savings account for your Corporation Tax and a personal savings account where you can set aside the personal tax that’ll be payable on any dividends you withdraw 

• Regularly review your company’s performance and retained profits before declaring any dividends 

• Speak directly to your Aardvark Client Director to ensure dividend timings are planned effectively  

All limited company director’s circumstances are different; therefore the right balance of salary and dividends will depend entirely on your company’s profits, your personal tax position, and what your long-term financial goals are.  

Before you take any money out of your company, ensure you’re following HMRC’s rules and setting aside enough money to cover any future tax payments. If you need clarification or just want to talk through your plans, simply get in touch with your Aardvark Client Director. If you’re not yet an Aardvark Accounting client, speak to us today to find out more.