If you run a limited company, one of the biggest perks is the flexibility in how you pay yourself. But with that flexibility comes confusion. Should you take a salary, dividends… or a bit of both? And what’s this “director’s loan account” everyone keeps talking about? Let’s break it down in plain English (with no scary tax jargon!) so you know exactly what you can and can’t do.
Why you can’t just take money out of your company
Let’s start with a common misconception. As a director of a limited company, you can’t just dip into the business bank account like it’s your personal piggy bank. Even if you own the whole company, the money belongs to the company, not you personally. Taking money out incorrectly can lead to tax trouble, unexpected penalties and some seriously unhappy HMRC letters.
So, how can you get paid? You’ve got three main options:
- A salary (like an employee)
- Dividends (from profits)
- A director’s loan
Each has its place, but they come with very different tax treatments and rules. Let’s look at them.
Salary: your tax-efficient base
A salary is often the foundation of a smart director’s pay strategy. Why?
- It counts towards your state pension and benefits entitlement.
- It’s a tax-deductible business expense for the company.
- It helps you use your personal allowance efficiently.
For 2025/26, we’re recommending a salary of £12,570. This uses up your full personal allowance and ensures you qualify for the State Pension. It does mean the company will pay employer’s National Insurance of £1,136, but this is often outweighed by the tax relief and future benefits.
You could opt for a lower salary (like £5,000) to avoid NICs entirely—but this means losing out on part of your personal allowance and pension qualifying years. So for most directors, £12,570 strikes the best long-term balance.
👉 Read our full guide to the best director’s salary for 2025/26
➡️ HMRC guidance: National Insurance thresholds and rates
Dividends: top-up from profits
Once your company has paid its bills, taxes, and kept enough in reserves, you can pay yourself a dividend from what’s left.
Dividend tax is lower than income tax—great news! But there’s a catch: dividends must come from profit, not just cash in the bank.
For 2025/26, the dividend allowance is just £500, and rates are:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate
- 39.35% for additional rate
So, while dividends are still tax-efficient, the savings aren’t what they once were.
👉 Here’s everything you need to know about dividend tax
➡️ HMRC guidance: Tax on dividends
Director’s loan account: tread carefully!
This is where things get spicy. If you take money out of the company that isn’t a salary or dividend, it goes into your director’s loan account (DLA). Think of it as an IOU between you and your company.
If the DLA is in credit—you’ve loaned the company money—you’re golden. You can even charge the company interest if you like. But if it’s overdrawn—you’ve borrowed money from the company—it gets more complicated.
What happens if the loan isn’t repaid?
If you don’t repay the loan within 9 months of the end of your company’s accounting year, HMRC charges the company 32.5% temporary tax on the outstanding amount. This is called Section 455 tax. It’s refundable only when you repay the loan.
Even worse, if you write off or never repay the loan, it could be treated as income, taxed like a dividend or, in some cases, as employment income with National Insurance due. Either way, not ideal!
➡️ HMRC guidance: If you owe your company money
Benefit in kind (BIK): if your loan goes over £10,000
If you borrow more than £10,000 at any point in the tax year and don’t pay your company interest at HMRC’s official rate (currently 2.25%), then HMRC sees that as a cheap loan, and that counts as a benefit in kind (BIK).
Here’s what that means:
- You will pay tax on the cash benefit you’ve effectively received.
- The company must pay Class 1A National Insurance on the benefit value.
- You’ll also need to report it on a P11D form each year.
You can avoid the BIK charge if:
- The balance never goes over £10,000, or
- You repay the loan in full before the end of the tax year, or
- You charge yourself interest at the official HMRC rate.
➡️ HMRC guidance: Tax on directors’ loans over £10,000
So what’s the best approach?
For most directors, the best mix is:
- A low salary (up to the NI threshold)
- Top-up dividends, if there’s profit
- Avoid director’s loans, or only use them temporarily
This combo keeps your tax bill low, ensures you qualify for benefits like the state pension, and keeps your company compliant.
And if your business has multiple shareholders? Consider using alphabet shares to tailor dividends for each person. It’s a brilliant way to stay flexible while staying on the right side of the tax man.
👉 Read why alphabet shares could be a smart move
Final word: stay informed, stay compliant
Paying yourself smartly isn’t just about saving tax—it’s about keeping your business safe and future-proof. A few small mistakes (like an overdrawn loan you forget to repay) can lead to big tax bills later.
If you’re not sure what’s best for your situation, we’re here to help. We’ll work out a payment structure that suits your lifestyle, your goals, and your company’s cash flow.