One of the big questions I get from business owners is: “What’s the best way to pay myself?”
There isn’t a single answer, but there are a few common routes. Each has its pros, cons, and things to watch for.
If you understand the options, you can make better decisions for your situation (with your accountant’s input).
Option 1: Salary
Paying yourself a salary means:
- It’s processed through PAYE (like an employee)
- You and the company pay National Insurance (unless it’s under certain thresholds)
- The salary is a business expense, so it reduces your corporation tax
Some directors choose to take a small salary, often around the level of the National Insurance threshold, to keep NI low but still qualify for state pension credits.
Option 2: Dividends
Dividends are paid from your company’s after-tax profits. That means corporation tax is already deducted before you pay them.
A few key points:
- Dividends aren’t a business expense — they don’t reduce corporation tax
- They’re taxed differently to salary (with their own allowance and rates)
- If your company has more than one shareholder, all shareholders receive dividends in proportion to their shareholding
- You’ll need to keep records of any dividend payments, including board minutes and vouchers, even if it’s just you
Dividends can be tax-efficient, especially alongside a small salary, but they need to be planned with the company’s profit and share structure in mind.
Option 3: Employer Pension Contributions
If your company pays into your pension as an employer contribution:
- It’s a business expense, so it reduces corporation tax
- It doesn’t go through payroll, so there’s no National Insurance
- You can invest the money for your future straight away
The trade-off? You can’t access that money until you reach pension age, so it’s a longer-term strategy, not one for day-to-day living costs.
In my experience, most directors overlook the power of employer pension contributions. It’s one of the most underutilised tools for reducing corporation tax while building long-term wealth.
Mixing Your Options
Many directors use a blend:
- A smaller salary to keep NI in check and qualify for state pension credits
- Dividends to top up income in a tax-efficient way
- Employer pension contributions to build long-term wealth and reduce corporation tax
The right mix depends on your profits, cash flow, personal income needs, and plans for the business.
Final Thoughts
There’s no single “right” answer to paying yourself. It’s about knowing your options, understanding the tax treatment, and making a choice that fits your goals, both now and in the future.
Talk it through with your accountant, especially if:
- You have other shareholders
- You’re considering a large pension contribution
- Your income pushes you into higher tax bands
As someone who’s worked with dozens of directors to optimise their pay strategies, I’ve seen firsthand how small changes can lead to big savings and this is how we start to build up our personal wealth outside the business.
Ready to plan your director’s pay strategy with confidence?
I know this can feel overwhelming—especially if you’re juggling multiple priorities in your business. But with the right strategy, paying yourself doesn’t have to be complicated. It’s about making informed decisions that align with your goals.
Imagine feeling confident every time you pay yourself—knowing you’re not leaving money on the table or overpaying taxes. In my 90-day 1:1 coaching package, we’ll create a pay strategy tailored to your goals, so you can focus on growing your business while building wealth for the future. Let’s make paying yourself feel simple and stress-free.