How do dividends and salary work for Limited Company directors?

When running a limited company, understanding how to pay yourself is key to working tax-efficiently and staying compliant with HMRC. Balancing salary and dividends correctly can help you optimise your take-home pay while ensuring your company meets all its legal obligations. 

This article explains how salary and dividends differ, how dividends are taxed, what to watch out for with Director’s Loan Accounts, and the importance of careful planning for Corporation and personal tax. 

• Salary and dividends are taxed differently – understanding both helps improve tax efficiency 

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

• Keep your Director’s Loan Account balanced to avoid additional tax charges 

• Always plan ahead for Corporation Tax and personal self-assessment payments 

• Seek tailored advice from your accountant before withdrawing funds from your company 

Salary

A salary is employment income, meaning it’s subject to Income Tax and National Insurance Contributions (NICs). It can be paid even if your company hasn’t made a profit and can count toward your state pension and statutory benefits. 

However, because salaries attract both employer and employee NICs, many limited company directors review their salary levels each year with their accountant to ensure they’re paid efficiently. 

Dividends

Dividends are payments made to shareholders from post-tax company profits. They’re not subject to NICs and are generally taxed at lower rates than salaries, making them an attractive way to distribute profits. 

To remain compliant: 

• Only pay dividends if your company has sufficient retained profit 

• Record all dividend declarations via board minutes 

• Provide dividend vouchers to all shareholders (most accounting software can generate these automatically) 

Dividends taken when there are not sufficient profits in the company are considered illegal dividends and may be reclassified as a director’s loan or disguised salary by HMRC. This could result in additional tax or penalties.

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

Important details: 

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

• For example, a dividend declared on 1st April 2027 but paid on 7th April 2027 counts toward the 2026/27 tax year 

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

• If your first self-assessment tax bill exceeds £1,000, Payments on Account may apply, requiring advance payments toward the next tax year’s liability 

• Dividends are taxed after all other forms of income. This means that income from sources such as employment, rental properties, or pensions will first use up your basic rate band, with any dividend income then taxed at the applicable dividend tax rates within the remaining tax bands 

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

A DLA records any transactions between you and your company that are not salary, dividends, or reimbursed expenses. If you withdraw funds beyond what your company owes you, the account becomes overdrawn, meaning the company is effectively lending you money. 

Common mistakes to avoid

• Declaring dividends without profits – leads to an illegal dividend 

• Poor documentation – failing to create minutes and dividend vouchers 

• Mixing withdrawals – confusing DLAs with dividends or reimbursed expenses 

• Ignoring repayment deadlines – not clearing an overdrawn DLA within 9 months of the company’s year-end can trigger a Section 455 tax charge (currently 35.75%) 

Corporation Tax

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

Personal Tax

Because dividends are paid gross (with no tax withheld), 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 through self-assessment by 31st January following the tax year end 

Avoiding cash flow shocks

Tax bills, especially the first one, can catch new limited company directors off guard. 

To prevent this: 

• Set up a separate business savings account for corporation tax and a personal savings account to set aside the personal tax payable on dividends withdrawn 

• Regularly review company performance and retained profits before declaring dividends 

• Speak to your accountant to plan dividend timing effectively 

Each director’s circumstances are different. The right balance of salary and dividends will depend on your company’s profits, your personal tax position, and your long-term financial goals. 

Before taking money out of your limited company, check that you are following HMRC’s rules and setting aside enough for future tax payments. If you’re ever unsure, speak with your Client Director. And if you’re not yet an SG client, get in touch today!