The one-paragraph version
Most UK founder-directors pay themselves a small salary — typically around the £12,570 personal allowance — and take the rest as dividends from post-tax profit. The salary is corporation-tax-deductible, keeps your state pension record alive, and mostly escapes income tax; dividends escape National Insurance entirely and are taxed at lower rates than salary. The result is usually the lowest legal total tax on money extracted from a company.
But three details decide whether the pattern actually works for you: whether your company can pay dividends at all (it needs distributable profit), how the Employment Allowance changes the ideal salary, and staying out of the director's loan trap while you wait for profit to exist. The full guide covers each, with a worked example.
Why the split beats a big salary
Salary above the thresholds attracts income tax (20/40/45%) plus employee NI plus employer NI (15% above £5,000). Dividends attract no NI at all, and are taxed at 8.75% (basic), 33.75% (higher), 39.35% (additional) after a £500 dividend allowance. Even accounting for the fact dividends come from profit that's already paid corporation tax (19–25%), the combined take on the dividend route is usually meaningfully lower — and the small salary carves out the best of both.
Setting the salary
- Solo director, no staff: around £12,570/year is the common answer — no income tax, minimal NI, full state-pension qualifying year, corporation tax relief on the lot. (Employer NI applies above £5,000; it's modest and still usually worth it for the CT saving — your accountant should run your exact numbers.)
- Two or more employees/directors on payroll: the Employment Allowance (up to £10,500 off employer NI) is typically available, which often pushes the ideal salary to the full personal allowance with no employer-NI sting.
Dividends: the rules that bite
- Dividends can only come from distributable profit — accumulated, post-corporation-tax. Paying dividends your accounts can't support makes them unlawful, reclassifiable as loans or salary, and a genuine problem in due diligence when you raise.
- Paper matters. Board minute + dividend voucher per payment, paid in proportion to shareholdings. Five minutes of admin that makes the dividend real.
- Personal tax is yours to hold back. The company doesn't withhold anything on dividends — set aside your dividend tax as you go, because it lands in one lump via self assessment on 31 January.
The director's loan trap Drawing “whatever, whenever” creates an overdrawn director's loan account. If it's still outstanding 9 months and a day after year-end, the company pays a 33.75% tax charge (S455) — refundable eventually, but a brutal drain on runway. Loans over £10,000 also trigger a taxable benefit-in-kind. A monthly salary + planned quarterly dividends avoids the whole mess.
A worked example
Founder, solo director, company makes £60,000 profit before any founder pay:
- Salary £12,570 — deductible, so taxable profit falls to ~£47,430 (less small employer-NI, also deductible).
- Corporation tax at 19% ≈ £9,000; roughly £38,400 of post-tax profit available.
- Take £37,700-ish of dividends: first £500 tax-free, the rest at 8.75% while you stay in the basic band — call it ~£3,200 personal tax, due the following January.
- Total extracted: ~£50,000. Total tax and NI across company and founder: ~£12,600. The same £50,000 as pure salary would cost several thousand more once employee and employer NI join in.
(Illustrative, current rates, no other income — your numbers will differ. That's what we're for.)
When the pattern changes
- Raising SEIS/EIS soon? Investors read your payroll. Modest, defensible founder pay reads well; aggressive extraction the quarter before a raise doesn't.
- Profits pushing £50k+? Marginal corporation tax relief, pension contributions (company-paid, fully deductible, no NI) and timing of dividends across tax years start to matter — real planning territory.
- Spouse/partner shareholders? Legitimate and common, but structure it properly from the start.
Every one of our startup packages includes setting your pay pattern up and running the payroll side of it.
