A new director unsure how to pay themselves tax efficiently

Would you rather someone else handled this? Our limited company accounts service means year end accounts and the CT600 prepared and filed for you.

This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.

The scenario

Someone has just incorporated. The company will make around £60,000 of profit before paying them anything. They are the only person on the payroll. They have read that you take a small salary and the rest as dividends, and they want to know what small means.

Why there is no single right number

The internet will give you a figure with great confidence. Be careful, because the answer genuinely depends on facts about you.

The logic behind a low salary is straightforward. Salary is deductible against corporation tax and it builds your state pension record, but it carries National Insurance. Dividends carry no National Insurance but come out of profit that has already paid corporation tax, and they now face higher personal rates than they did.

So you are balancing corporation tax relief and pension credit against National Insurance, and the balance point moves whenever any of those rates change. They changed in April 2026.

The Employment Allowance trap

This is the detail that catches almost every new single director company, and it is the reason a number copied from a forum can be wrong.

The Employment Allowance is £10,500 off your employer National Insurance bill. But a sole director with no other employees paid above the secondary threshold cannot claim it.

So the salary level that is optimal for a company with two people on the payroll is not the level that is optimal for a one person company, because one of them can shelter employer National Insurance and the other cannot. Guidance that ignores this is guidance for somebody else.

What else changes the answer

Your other income. If you have a job, a pension, or rental income, your bands are already partly used. The optimal extraction for someone with no other income is not the same as for someone already at £40,000 elsewhere.

Your state pension record. A salary at or above the lower earnings limit gives you a qualifying year. If you are short of 35 years, that is worth more than the tax saving on offer.

Whether you need the money. Profit left in the company is not taxed on you at all until you take it. If you do not need it this year, taking it anyway just to follow a rule is often the expensive choice.

Pension contributions. Employer contributions from the company are deductible and avoid the whole salary versus dividend question entirely. For a director who does not need the cash now, this is frequently better than either route.

The approach we would take

Model it on your actual numbers rather than a template, including your other income and your National Insurance record.

Do it before the year end. Dividends need distributable profits and proper paperwork, and cannot be invented retrospectively in March for a year that has already gone.

Revisit it annually. The rates moved in April 2026 and are due to move again. Last year answer is not automatically this year answer.

The point of this example

The small salary and dividends rule of thumb is a starting point, not an answer. The single biggest variable for a new one person company, the Employment Allowance, is the one that generic advice almost always omits.

If you have just incorporated and want the number worked out for your situation, get in touch.