Directors Salary – the Basics

Kirsty Young Limited Company

So you’ve formed your new limited company, and earned some money. Great!

The most important question you need to answer now is “How do I pay myself?”.

Here are some of the basics you need to know about how to pay yourself as a small limited company owner.

The ‘easy’ option

At some point in your life you’ve probably worked for someone, in a job, as a salaried employee. When you did this, you will have received a payslip, detailing your pay and with appropriate amount of tax and national insurance deducted.

This option is still open to you as a director and is in reality, the default. In order to do this, you will need to run a ‘payroll’, often referred to as a PAYE scheme.

To run your own payroll, you will need to:


  • Submit a report on or before each time you pay yourself.

Remember, as with all things with HMRC, there is an instant fine each time you miss this ‘Real Time Information’ return. So make sure you mark the dates in your diary and put time aside on the due day.

How to do your own payroll/PAYE scheme

Many accounting software providers will offer a system to do your payroll. There is also a free tool from HMRC, interestingly named ‘Basic Tools’. We aren’t sure ‘basic’ is the description we’d use, but it does work!

Equally, many accountants will do this service either as part of your regular accounting service or as a stand-alone service. You can also use specialist payroll providers.

Advantages of running your own PAYE scheme

  • You get a reduction in your corporation tax (company tax) bill as you can deduct your salary from your profits before you are taxed.
  • You will build up a state pension record (presuming you pay yourself over around £6300 a year). This helps towards you getting the maximum state pension.
  • Your income is straightforward. You are employed by your company, and have payslips to prove it what you’ve been paid.
  • You have no extra personal tax bill or tax return (generally) to worry about if this was your only income.

Disadvantages to running your own PAYE scheme

  • It’s not tax efficient in most cases for you. You will pay more tax than the dividend option below, because you will need to pay National Insurance, possibly twice. (Once for you, once as the company).
  • Operating a PAYE scheme is not as simple as it appears.
  • PAYE is not flexible. You need to submit a report on or before each time you pay yourself. This isn’t ideal if you like to draw money as and when during the month.

The ‘dividend’ option

You could just pay yourself a share of profits from the company, known as dividends. This option presumes that you own shares in the company, and have sufficient profits to do this.

If you have another regular job paid through PAYE alongside your own limited company activity, taking dividends is a common way to pay yourself. This is because you won’t pay National Insurance on these dividends, so they are quite tax efficient.

If the company is your only source of income, it’s more common to do the third ‘common’ option below.

Advantages of paying yourself in dividends

  • Cheaper in many cases in combined tax/lack of National Insurance.
  • Don’t have to operate a PAYE scheme / run a payroll.

Disadvantages of paying yourself in dividends

  • No tax deduction from your company profits, so you could be missing out on paying less tax.
  • If you did pay yourself only using dividends, and did not have another job, it’s likely you would miss out on a ‘state pension year’. This means that you might be putting the maximum amount you could get in state pension at risk.
  • Your do need certain paperwork to prove the dividends you paid yourself were legal.
  • You will need to complete a tax return and pay personal tax on dividends over £2000 a tax year.

The ‘common’ option

The more common scenario is you split your pay, paying yourself some salary, and some dividend/s.

How you split this is very specific to your situation.

So here’s an example. Where the limited company is your only job, a common level for the 21/22 tax year would be:

  • £8840 in salary.
  • The rest of any money you draw will be in the form of dividends.

This way, you get a balance and the best of both options above.

Advantages of the common / split option

  • You build a state pension record.
  • You will get a company tax deduction for this small amount of salary (worth over £1600).
  • You would not pay any National Insurance.
  • You have the flexibility to draw money as and when required (with the correct paperwork in place)

Disadvantages of the common / split option

  • You would still need to operate a PAYE scheme, which is not as simple as it appears.
  • You need certain paperwork to prove the dividends were legal.
  • You will need to complete a tax return and pay personal tax on dividends over £2000 a tax year.

So, which option is right for me?

Good question! Ask your accountant or book a consultation with us to help you decide what’s right for you and your unique situation. Our team offer a paid 1-hour, 1-2-1 consultation, a great way for you to get the help you need without switching accountants if you don’t want to.