Key Points
You have built a profitable limited company. Now you need to get that money into your personal bank account. The question every director asks: what is the most tax-efficient way to pay myself?
The answer depends on how much profit you have, your personal circumstances, and how much you need to extract. But for most UK directors, the optimal strategy is clear: a combination of salary, dividends, and pension contributions. This guide explains all five methods and shows you exactly how to minimise your tax bill.
The Optimal Strategy for 2026/27
The 5 Ways to Take Money Out of a Limited Company
Every pound you extract from your company can go through one of these five routes. Each has different tax implications. Understanding them is the foundation of tax-efficient profit extraction.
1. Director's Salary
Paid through PAYE, taxed like employment income
£12,570/year
£0
£0
£1,136
Why £12,570? This matches your personal allowance exactly. You pay zero income tax and zero employee NI. The employer NI cost (£1,136) is tax-deductible for the company, so the net cost is lower. Taking salary also builds your state pension record.
2. Dividends
Paid from post-Corporation Tax profits
£500
10.75%
35.75%
39.35%
The double tax trap: Dividends come from profits already taxed at 19-25% Corporation Tax. Then you pay dividend tax personally. Combined effective rate for higher-rate taxpayers: 54.5%. Still better than salary above the personal allowance, but pensions beat both.
3. Employer Pension Contributions
MOST EFFICIENTCompany pays directly into your pension
£60,000
Deductible
£0
£0
Why pensions win: No Corporation Tax (deductible expense), no employer NI, no personal income tax. The money goes straight into your pension. You can access it from age 55 (57 from 2028), with 25% tax-free. For higher-rate taxpayers, pensions deliver approximately £3,575 more value per £10,000 than dividends.
4. Expenses Reimbursement
Claiming back legitimate business costs
45p/mile
£6/week
£0
Deductible
Often overlooked: Business travel, equipment, software, professional subscriptions, training, and home office costs can be reimbursed tax-free. Keep receipts and records. These reduce company profits (less Corporation Tax) and get money to you without personal tax.
5. Director's Loan
USE WITH CAUTIONBorrowing money from your company
£10,000
9 months
33.75%
2.25%
The trap: If you do not repay within 9 months of your company year-end, the company pays 33.75% Section 455 tax (refundable when repaid, but ties up cash). Loans over £10,000 trigger benefit-in-kind tax. Generally avoid unless you need temporary cash and can repay quickly. Read our Director's Loan guide for details.
Tax Comparison: £10,000 Extraction
Here is what happens when you extract £10,000 using each method (assuming higher-rate taxpayer):
| Method | Company Cost | Total Tax | You Receive | Effective Rate |
|---|---|---|---|---|
| Employer Pension | £10,000 | £0* | £10,000 | 0% |
| Salary (within PA) | £11,500 | £1,500 | £10,000 | 13% |
| Dividends (basic rate) | £12,500 | £3,575 | £8,925 | 29% |
| Dividends (higher rate) | £12,500 | £6,075 | £6,425 | 49% |
| Salary (higher rate) | £11,500 | £5,550 | £5,950 | 48% |
*Pension contributions are not taxed going in. You pay income tax when you withdraw in retirement, but 25% comes out tax-free and you will likely be in a lower tax bracket.
The Optimal Extraction Strategy for 2026/27
Based on current tax rates, here is the recommended order of extraction for most directors:
Take £12,570 salary
Uses your personal allowance. Zero income tax, zero employee NI. Employer NI of £1,136 is tax-deductible. Builds state pension record. Non-negotiable for most directors.
Maximise employer pension contributions
Up to £60,000/year or 100% of salary (whichever is lower). If you have unused allowance from the past 3 years, you can carry it forward. This is the most tax-efficient extraction method available.
Take dividends up to the basic rate band
With £12,570 salary, you have £37,700 of basic rate band remaining (up to £50,270 total income). Dividends in this band are taxed at 10.75%. much lower than the 35.75% higher rate.
Consider leaving profits in the company
If you do not need more cash, leaving profits in the company (paying only 19-25% Corporation Tax) can be more efficient than extracting at higher-rate dividend tax. Useful for building reserves or future pension contributions.
Watch the £100,000 Trap
Income over £100,000 triggers personal allowance tapering. you lose £1 of allowance for every £2 over £100k. This creates an effective 60% marginal tax rate between £100,000 and £125,140. If you are approaching this threshold, consider pension contributions to bring your income below £100k. Read our 2026/27 salary guide for details.
Common Mistakes Directors Make
Taking no salary at all
You miss out on state pension credits and waste your personal allowance. Even if you take only dividends, taking £12,570 salary first is almost always more tax-efficient.
Ignoring pension contributions
Many directors focus on salary vs dividends and forget that pensions beat both. If you can afford to lock money away until retirement, employer pension contributions should be maximised.
Declaring dividends without sufficient profits
Dividends can only be paid from retained profits. If your company does not have accumulated profits after tax, dividends are "unlawful" and may need to be repaid. Always check your profit position first.
Using director's loans as regular income
Director's loans are for temporary cash needs, not regular extraction. If you repeatedly borrow and repay to avoid tax, HMRC may treat it as income. The "bed and breakfasting" rules are strict.
Not keeping proper dividend documentation
Every dividend needs board minutes and a dividend voucher. Without proper records, HMRC could reclassify dividends as salary (triggering NI) or question whether they were lawfully declared.
Frequently Asked Questions
Do I have to pay myself a salary as a director?
No legal requirement, but highly recommended. Taking at least £6,396 ensures state pension credits. Taking £12,570 is optimal as it uses your personal allowance tax-free.
Can I just take all my money as dividends?
Technically yes, but it's tax-inefficient. You'd waste your personal allowance and pay more tax overall. Taking £12,570 salary first almost always saves money.
When should I pay myself dividends?
Whenever you have retained profits and need the cash. Many directors declare dividends monthly or quarterly. Just ensure you have the profits available and document each dividend properly.
How much can I put into my pension from my company?
Up to £60,000 per year, or 100% of your salary, whichever is lower. You can also carry forward unused allowance from the previous 3 years if you were a pension scheme member.
What if I need more than my optimal salary and dividends allow?
You can take higher-rate dividends (35.75% tax) or additional salary (40%+ tax plus NI). Neither is ideal, but sometimes necessary. Consider whether you really need the cash or could leave it in the company.
Can my spouse receive dividends from my company?
Only if they are a shareholder. If you give them shares, they become entitled to dividends. This can be tax-efficient if they're in a lower tax bracket. But be aware of 'settlements' rules. HMRC may challenge arrangements that artificially shift income.
Calculate Your Optimal Strategy
Our free salary calculator shows exactly how much to take as salary vs dividends based on your profit level. See the tax impact of different scenarios and find your optimal extraction strategy.
Related Reading
Optimal Director Salary 2026/27
How dividend tax changes affect your strategy
Pension Contributions for Directors
The most tax-efficient way to extract profit
Director's Loan Account Guide
Avoiding the Section 455 tax trap
UK Dividend Tax Increase 2026
Complete guide to the April 2026 changes
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