Director Pay and taking money out.
Salary, dividends, pension contributions and the director's loan account. These are the four ways money comes out of a limited company, and the order and mix matter for how much tax you pay.
Salary vs dividends
A low salary at the NI Secondary Threshold preserves State Pension years; dividends extract the rest free of NI at lower rates.
Jump to section 02Not a static formula
Optimal split shifts each tax year. Thresholds move, other income changes, longer-term plans for the business matter.
Jump to section 03Pension as extraction
Employer pension contributions are CT-deductible, often the most efficient extraction route, especially inside the MR band.
Jump to section 04The S455 trap
An overdrawn director's loan unpaid within 9 months of period-end triggers Section 455 tax at 33.75%, avoidable with forethought.
Jump to sectionThe Core Decision: Salary vs Dividends
Most UK limited company directors pay themselves a combination of a low salary and dividends. The salary is set at or near the NI Secondary Threshold to preserve State Pension qualifying years without triggering significant National Insurance contributions. Remaining profit is then extracted as dividends, which are free of NI and taxed at lower rates than employment income.
But this isn't a static formula. The optimal extraction strategy changes every tax year as thresholds shift, and it depends on your company's profit level, whether you have other income sources, your household tax position, and your longer-term plans for the business.
Beyond the Basics
- Pension contributions: Employer pension contributions are deductible from corporation tax, making them one of the most tax-efficient extraction methods, especially in the Marginal Relief band. The mechanics and year-end clearance rules are in the pension contributions timing guide.
- Bonus vs dividend: A bonus is deductible for Corporation Tax but attracts employer NIC; a dividend is NIC-free but not deductible. The dividend vs bonus guide walks through the arithmetic at each rate combination.
- Director's loan accounts: Drawing cash from your company outside of salary and dividends creates a director's loan. If not managed carefully, an overdrawn DLA triggers Section 455 tax at 33.75%.
- Timing: Dividend declarations can be timed across tax years to utilise allowances efficiently. A structured year-end planning review is the practical mechanism, not retrospective accounting.
Go Deeper
Company Pension Contributions for Directors
How employer pension contributions can reduce Corporation Tax, what directors need to check, and why timing before year-end matters.
GuideDirector Loan Account Guide
How director loan accounts work, including overdrawn balances, Section 455 tax, benefit in kind issues and clearing loans before deadlines.
GuideSalary vs Dividends in 2026
How UK company directors can compare salary and dividends, including National Insurance, dividend tax, Corporation Tax and cash extraction.
Related Tools & Services
Work out your salary-and-dividend mix against your numbers.
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