Salary and dividends for directors

Many owner managed company directors take money from their company through a mixture of salary and dividends. The right approach depends on company profits, payroll, available reserves, other income, National Insurance, personal tax and cash flow.

Director salary through payroll

A director can be paid a salary by the company. Salary is normally processed through PAYE payroll, with the company reporting pay and deductions to HMRC. If salary is paid, the Full Payment Submission is normally sent on or before payday.

Directors are treated as employees for National Insurance purposes, but director National Insurance is calculated using annual earnings rules. This can make director payroll feel different from ordinary employee payroll, especially where salary changes during the year.

Dividends from company profits

A dividend is a distribution of company profits to shareholders. Dividends should only be paid if the company has enough distributable profits after considering its financial position. Directors should not treat every transfer from the business bank account as a dividend automatically.

GOV.UK guidance explains that a company should usually keep minutes of the decision to pay a dividend, even if there is only one director, and provide a dividend voucher showing the date, company name, shareholder name and dividend amount.

Why dividend paperwork matters

Good paperwork helps show whether money taken from the company was salary, dividend, expense reimbursement, repayment of a director loan or something else. This becomes important when preparing accounts, Corporation Tax returns and Self Assessment tax returns.

Dividend allowance and dividend tax

Dividend tax is personal tax, not Corporation Tax. GOV.UK states that the dividend allowance is £500 for both 2025 to 2026 and 2026 to 2027. Dividends above the allowance are taxed according to the director’s Income Tax band.

It is useful to show both years because many directors will still be preparing 2025 to 2026 Self Assessment tax returns up to the 31 January 2027 online filing and payment deadline.

The 2026 to 2027 change increases the basic and higher dividend tax rates by 2 percentage points. The additional dividend rate remains unchanged at 39.35%. These figures can change in future Budgets, so they should be reviewed each tax year.

Director loan accounts

A director loan account records money between the director and the company that is not salary, dividend, expense repayment or money previously introduced to the company. If the director owes money to the company, the account is overdrawn.

Overdrawn director loan accounts can create tax consequences for the company and potentially for the director. The position depends on the amount, timing, repayment and whether the director is also a shareholder. It is better to identify this during the year rather than after the accounts are prepared.

Self Assessment for directors

Company directors may need to complete a Self Assessment tax return, particularly where they receive dividends, benefits, other income or have tax that cannot be fully collected through PAYE. The personal tax return should line up with the company records.

This is why director tax support should not sit in isolation. It connects to payroll, dividend paperwork, company accounts, Corporation Tax and bookkeeping.

Records directors should keep

Clear records reduce confusion at year end and make tax planning easier. Directors should keep payroll reports, dividend vouchers, board minutes, director loan account records, expense claims, company bank records and details of any benefits or personal costs paid by the company.

When to ask for help

You should ask for help if you are unsure whether a payment should be salary or dividend, the director loan account may be overdrawn, payroll has not been reported, dividend paperwork is missing, or your personal tax position has changed.

Durja Associates helps directors keep company accounts, payroll and personal tax joined up so decisions are made with cleaner information.