How to Pay Yourself Tax-Efficiently as a Business Owner in 2025/26
- JSC Accounting Team
- Oct 6
- 2 min read
Running your own limited company gives you flexibility, but it also brings new decisions such as how to pay yourself. The goal is to strike the right balance between keeping more of your income and staying compliant with HMRC.
The main options
Most directors pay themselves using a mix of salary and dividends. Here’s how each one works:
Salary: treated as a normal business expense, it reduces your company’s profit and therefore your corporation tax. However, you’ll pay income tax and National Insurance once your salary exceeds the personal allowance (£12,570 in 2025).
Dividends: these are paid from the company’s post-tax profits. They don’t incur National Insurance, and the first £500 per year is tax-free. Dividend tax rates are lower than income tax, which is why most directors use them alongside a small salary.
CAUTION: If you're a single director company with no other employees, you will be limited to gross annual pay of £5,000 (£417 per month) due to the Employers National Insurance threshold, unless you want to contribute NI credits towards your state pension.
The typical small business approach
A common setup is:
Pay a low salary (just above the National Insurance threshold)
Take additional income as dividends, depending on profits available
This combination ensures you receive National Insurance credits towards your state pension but keep overall tax lower than if you took everything as salary.
Timing and planning
You can only declare dividends if your company has retained profits, so accurate bookkeeping is key. Declaring dividends without available profits can lead to HMRC penalties.
It’s also worth thinking about timing. If you expect higher income this year, you might split dividends across two tax years to stay within lower bands. Likewise, employer pension contributions can be a powerful tool to extract profit while reducing corporation tax.
Don’t forget cash flow
Dividends are easy to overlook when it comes to cash flow. Always leave enough money in the business to pay VAT, payroll, and corporation tax.
A healthy cash reserve avoids stress when bills come due.
The simple takeaway
There’s no one-size-fits-all answer. The best setup depends on your income level, growth goals, and personal situation.
Reviewing your pay strategy each year with your accountant ensures you stay efficient and compliant.
Need help making sense of your taxes? JSC Accounting works with small businesses across the UK to keep things simple and compliant. Get in touch for a friendly chat about how we can help.
