How to Pay Yourself Tax-Efficiently as a Director: Salary, Dividends and Pensions Explained
As a limited company director, how you pay yourself can make a big difference to your tax bill. A smart balance between salary, dividends, and pension contributions can help you save money and secure your future.
Why This Matters
If you pay yourself too much salary, you may be overpaying in Income Tax and National Insurance. If you ignore salary altogether, you might miss out on qualifying for the State Pension and making personal pension contributions. The goal is to optimise both your take-home pay and long-term benefits.
The Solution
1. Pay Yourself a Low Salary Within the Personal Allowance
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Most directors choose a salary just above the Lower Earnings Limit (£6,500 for 2025/26) to maintain access to state benefits like the State Pension.
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A common figure is around £12,570 (the personal allowance), which is tax-free if it’s your only income.
2. Top Up with Dividends
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Dividends are taxed at lower rates than salary. After using your £500 dividend allowance (2025/26), the rates are 8.75%, 33.75%, and 39.35%.
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Make sure you only declare dividends from retained profit, and keep accurate board meeting minutes to back it up.
3. Use Pension Contributions to Maximise Tax Relief
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Pension contributions made by your company are a tax-deductible business expense.
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You also save on corporation tax while boosting your retirement savings tax-free.
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But: personal pension contributions usually require a minimum PAYE salary to qualify for tax relief. That’s why taking a salary matters!
Expert Tips & Common Pitfalls
Expert Tip: A salary above £6,500 triggers National Insurance credits, which count towards your State Pension, but stays below the threshold for actual NIC payments.
Common Pitfall: Forgetting to record dividend decisions properly in your company paperwork can cause HMRC issues down the line.
Call to Action
Want help getting this right? We’ll help you choose the best mix of salary, dividends and pension to suit your business and personal goals. Book a quick chat with Love Accountancy – stress-free, smart advice, personalised to you.
About Love Accountancy
We’re a friendly, tech-savvy team of accountants in Exeter & London, helping business owners across the UK simplify their finances, save time, and grow with confidence. Whether it’s getting the right salary strategy or using Xero to automate your books, we make accounting effortlessly easy. Looking for an accountant in Exeter or London or anywhere in the UK? Let’s grow together.