Your Company's Money Is Not Your Money

One of the first things that surprises new directors is realising the company bank account is not a personal piggy bank. A limited company is a separate legal entity, and every pound you take out has to have a proper label attached to it. Get that labelling right and you can keep thousands of pounds that would otherwise go to HMRC. Get it wrong and you can end up with penalties, an unwelcome tax bill, or a director's loan account that quietly costs you 33.75% in tax.

In practice, most owner-managers pay themselves in one of three ways: a salary through PAYE, dividends from post-tax profits, or — most commonly — a carefully judged mixture of the two. There is also a fourth route, reimbursing legitimate business expenses, which is tax-free but only ever covers money you have genuinely spent on the company's behalf.

Taking a Salary: PAYE, National Insurance and the Employment Allowance

A salary is the simplest route to understand. It is a deductible business expense, so it reduces your corporation tax bill, and it counts as earned income. That matters because it builds your National Insurance record towards the State Pension and can support mortgage applications.

• You need to register as an employer with HMRC and run payroll through Real Time Information (RTI) each month, even if the salary is below the point at which tax is due.
• Income tax starts once your salary exceeds your personal allowance, currently £12,570.
• Employer's National Insurance kicks in above the secondary threshold. Many single-director companies therefore set a salary at or just below that threshold, keeping employer NI at nil.
• Because salary is deductible, paying a little more can still be worthwhile: the corporation tax saved sometimes outweighs the extra National Insurance. This is the sort of calculation worth running each April with your accountant.
• The Employment Allowance can reduce your employer NI bill, but there are restrictions where a company's only employee is a director — so do not assume it applies to you.

Dividends: Paying Yourself from Profits

Dividends are distributions of profit, not wages. They are paid from money the company has already earned and already paid — or is due to pay — corporation tax on. There is no National Insurance on dividends, which is the main reason they are popular.

You can only declare a dividend if the company has sufficient distributable reserves. If it does not, the dividend is unlawful and HMRC can reclassify it, often as a director's loan.

• There is a dividend allowance each tax year — £500 at the time of writing — below which dividends are not taxed, though they still count towards your total income.
• Above the allowance, dividend rates are lower than salary rates, but they rise sharply once you cross into higher and additional rate bands.
• Dividends must normally be paid in proportion to shareholdings. If you want flexibility, you need different share classes set up properly, not an informal arrangement.

The Classic Mix — and Why Accountants Keep Recommending It

The standard strategy for a one-person company is a modest salary topped up with dividends. The salary uses up your personal allowance and secures your National Insurance record. The dividends then deliver the rest of your income at dividend rates, avoiding the employer and employee National Insurance that a larger salary would trigger.

The right split depends on your profit, whether you have other income, whether your spouse or partner holds shares, and how close you are to the higher rate threshold. A blend that saves £3,000 for one director can cost another money, so there is no single "correct" number.

The Paperwork You Cannot Skip

Whichever route you choose, HMRC expects a paper trail.

• Payroll: a payslip and an RTI submission for every pay period, plus a final PAYE submission at the year end.
• Dividends: a board minute recording the decision to declare, and a dividend voucher for each shareholder showing the date, amount and company details.
• Self Assessment: filing a personal tax return reporting salary and dividends, and paying any tax due by 31 January following the tax year.
• Company filings: annual accounts to Companies House, a confirmation statement, and a corporation tax return to HMRC.
• VAT: registration and quarterly returns once turnover passes the threshold.

Watch Out for the Details That Catch Directors Out

A few traps come up again and again. Taking money out without recording it as salary or dividends creates a director's loan account, which can trigger a 33.75% tax charge if it is not repaid within nine months of the year end. Paying dividends when there are no reserves is a breach of company law as well as a tax risk. Timing matters too: a dividend declared in March rather than April lands in a different tax year and can push you into a higher band.

If you also do contract work through your company for clients, off-payroll rules may force a salary route for some engagements, so check before you assume dividends are available.

Finally, do not overlook pensions. Employer pension contributions are generally deductible for corporation tax and are not subject to National Insurance, which often makes them the most tax-efficient way to extract value from a profitable company. Review your approach every year, keep your records tidy, and pay yourself deliberately rather than by habit.