February 26, 2026

If you run a micro entity limited company in the UK, the most tax-efficient way to pay yourself is usually a combination of a low salary and dividends. This approach keeps your National Insurance Contributions (NICs) low, reduces your corporation tax bill, and lets you take home more of what your company earns. In this guide, we will walk you through exactly how it works, what the numbers look like for the 2026/27 tax year, and what you need to watch out for so you stay on the right side of HMRC. What Does It Mean to Pay Yourself as a Director of a Micro Entity? As a director of a micro entity limited company, you and your business are two separate legal entities. That is one of the key differences between running a limited company and being a sole trader. Your company earns money, pays corporation tax on its profits, and only then can you take money out for yourself. You can take money from your company in three main ways: Director’s salary, paid through PAYE, just like any other employee Dividends, a share of the company’s after-tax profits Director’s loan, borrowing money from your company (which must be repaid) Most micro entity directors use a mix of salary and dividends. The director’s loan route is generally not recommended as a long-term strategy because it can create extra tax complications if not managed carefully. How Do I Pay Myself from My Own Limited Company? Step 1 – Register as an Employer with HMRC Even if you are the only director and the only employee, you need to register your company as an employer with HMRC before you start paying yourself a salary. You can do this through the HMRC website, and it is straightforward. Once registered, you will receive a PAYE reference number. Step 2 – Set Up a Payroll You need to run payroll each time you pay yourself a salary. This involves calculating your pay, working out any tax and National Insurance due, and submitting a Full Payment Submission (FPS) to HMRC in real time via RTI (Real Time Information). You can use HMRC’s free Basic PAYE Tools software, or an accountant can handle this for you. Step 3 – Decide on Your Salary Amount The salary level you choose as a director matters a great deal for tax purposes. We cover the most efficient amounts in the section below. Step 4 – Declare and Pay Dividends Once your company has made a profit and paid or set aside corporation tax, you can declare a dividend. You do this by holding a director’s meeting (even if you are the only director), recording a board resolution, and issuing a dividend voucher. The dividend is then paid from the company’s bank account into your personal bank account. Step 5 – Complete Your Self Assessment Tax Return As a director, you must complete a Self Assessment tax return each year by 31 January. This is where you report your salary, dividends, and any other income. Any tax owed on dividends above the annual dividend allowance is paid through Self Assessment. What is the Most Tax-Efficient Way to Pay Yourself as a Director? This is the question most micro entity directors want answered, and the good news is that the answer is fairly clear. The Low Salary Plus Dividends Strategy The most common and tax-efficient approach is to pay yourself a small salary, just enough to protect your State Pension entitlement, and then take the rest of your income as dividends. Here is why this works: Salary: When you earn above the Lower Earnings Limit (£6,708 for 2026/27), your earnings count toward your National Insurance record for State Pension purposes, but you do not actually have to pay any NICs. The most popular salary level for directors is set at the Primary Threshold (£12,570 for 2024/25), which sits within the personal allowance. At this level, there is no income tax to pay and no employee NI to pay either. There is also no employer NI at this level, so no extra costs for the company. However, from April 2025, employer NICs kick in at a lower threshold (£5,000 per year), so the optimal salary for 2026/27 will shift slightly; this is something your accountant should review each April. Dividends: After your salary uses up your personal allowance, you can take dividend income. For 2026/27, the dividend allowance is £500. Anything above that is taxed at the dividend tax rate, which is lower than income tax rates on salary: Income Tax Band Dividend Tax Rate Basic rate (up to £50,270) 8.75% Higher rate (£50,271 – £125,140) 33.75% Additional rate (above £125,140) 39.35% These rates are significantly lower than standard income tax rates of 20%, 40%, and 45%. That is why dividends are so attractive. What About Corporation Tax? Your company pays corporation tax on its profits before you can declare a dividend. For the 2026/27 tax year, the corporation tax rate is 19% for profits up to £50,000 (the small profits rate) and 25% for profits above £250,000. Companies with profits between £50,001 and £250,000 pay tax at a marginal effective rate due to marginal relief. For most micro entity directors with modest profits, the 19% rate applies, which is still lower than paying the full income tax rate on a higher salary. Is It Better to Pay Yourself a Salary or Dividends in the UK? When a Salary Works in Your Favour A salary is deductible from your company’s profits before corporation tax is calculated. So paying yourself a salary actually reduces your company’s tax bill. That is a real saving. If your company is making a loss or barely breaking even, a salary may not be helpful because there are no profits to reduce. But for profitable micro entities, paying a salary up to the personal allowance threshold (£12,570) is almost always worth doing. Beyond the personal allowance, taking more salary becomes less efficient because income tax and National Insurance kick in