How Much Should You Pay Yourself?
How Much Should You Pay Yourself? Wage Strategies in a Limited Company
There’s no denying the benefits that come with setting up a limited company, but contracting through a limited company does come with a few hurdles that being a sole trader or freelancer doesn’t. One of these is working out how much to pay yourself. When you’re employed, your employer determines your wage. When you’re a self-employed freelancer, most of what you earn is taken as income, with a handful of business costs taken out. But, when you set up a limited company, there are a few other things to consider. As it’s your business that’s making the money, rather than you as an individual, you need to find a way to pay yourself.
At Go Limited, we know there are a few different wage strategies to choose from when you have a limited company, and this can make it difficult to know where to start. You’ll need a salary, but how high should that be? You know dividends are an option, but what’s the benefit of including those in your income? These are all valid questions, and we’re here to help.
Managing Your Limited Company Wages
When you run a limited company, your wages involve more than just ensuring you have enough money to spend or to maintain a comfortable lifestyle. It’s crucial to manage your finances effectively overall. This means finding a balance between paying yourself and keeping your business financially stable.. Once you’ve set up a limited company for contracting, you’ll need to decide how to split your earnings between a regular salary and dividend payments. This looks slightly different from person to person, limited company to limited company.
When it comes to earning money, the first thing you think of is probably a salary, the money you’re given monthly as a reward for your hard work. But, there’s also another reason for paying yourself a salary. Even if you’re setting up your own limited company, paying yourself a salary is essential for contributing to National Insurance and maintaining your eligibility for state benefits and pensions. If you don’t pay yourself a salary, you could fall short and get to retirement age, only to find that you don’t qualify for the full pension amount. To avoid this, most people who are contracting through a limited company choose to pay themselves a salary slightly above the National Insurance threshold, as a way to minimise tax liabilities, whilst also staying eligible.
As an alternative to paying yourself a larger salary, you might choose to pay yourself in dividends. These are payments you can make to yourself from your limited company profits after corporation tax. As dividends are taxed differently from salaries - they have a lower tax rate - and so paying yourself in this way can minimise your tax liabilities, meaning you get more out of your income.
How Much Should You Pay Yourself If You’re Contracting Through a Limited Company?
When you first start contracting through a limited company, you need to decide how much to pay yourself. It can be tempting to simply just take money out of the business as and when you need it, but it’s better to have a strategy in place. You need to decide how much to pay yourself, as this requires you to balance your personal income with the financial needs of your business.
The exact amount you pay yourself will vary hugely, depending on how much money your limited company is bringing in and how much you need to earn to maintain your lifestyle. But, when you’re deciding how much to pay yourself if you’re contracting through a limited company, there are a few key things to consider.
Determine Your Salary
When it comes to deciding on a wage strategy when you’re setting up a limited company, you need to determine your salary. This doesn’t mean looking at what other contractors in your field are being paid and copying, it means working out how much you can pay yourself whilst also being tax efficient. For a lot of contractors, the answer is to pay themselves a salary that falls just above the National Insurance rate, which for the 2025/26 tax year is £12,570. By basing your salary off this, you make sure that you remain eligible for state benefits by paying National Insurance, whilst also paying a minimal amount of tax on your salary.
Boost Your Salary with Dividends
As a small salary is unlikely to be enough, boost your salary by using dividends for additional income. As dividends are taken from your business’ profits after tax, they are taxed at lower rates to salaries. For example, the basic tax rate for salaries is 20%, but the basic tax rate for dividends is 8.75%. For higher rate taxpayers, the rates are 40% and 33.75% respectively.
Keep Profits in Your Business
It’s tempting to pay yourself a hefty salary - after all, who doesn’ want a large payment arriving in their account each and every month? - but you need to make sure that some profits stay in the business. Keep enough money within the company to cover operating expenses, growth opportunities and unforeseen challenges. There’s bound to be a time when you need to invest in equipment, training or future projects, and you need the money to do so readily available.
Keep Money Aside for Tax
Regardless of what you do and the industry that you work in, you need to keep money aside for limited company tax. You need to set aside a percentage of your earnings to cover corporation tax, dividend tax and VAT, if applicable. The amount you set aside will depend on if you’re a basic or higher rate taxpayer, but most contractors reserve 20% to 30% of their income to cover tax obligations.
What are Limited Company Tax Obligations?
When you’re deciding how much to pay yourself, you need to factor in your limited company tax obligations. For example, you’ll need to pay corporation tax on your business’ profits. This is currently set at 19% for businesses making under £50,000 per year, and 25% on those with profits over £250,000. Reducing taxable profits through allowable expenses and pension contributions can help lower these costs, which is why it’s important to understand tax deductible expenses for a limited company.
It’s also important to remember that though dividends are taxed at lower rates than salaries, the rate of which they’re taxed does increase as you move into higher tax brackets. You’ll need to monitor your total earnings to avoid unexpected tax bills.
What are Tax Deductible Expenses for a Limited Company?
There are a lot of advantages that come with running a limited company as a contractor, one of which is having the ability to claim allowance expenses for a limited company, reducing your taxable profits. Claiming allowable expenses can help reduce your tax bill and increase your end income. This is an important factor to consider when deciding how much to pay yourself and have lef to develop your business further. When you claim allowable expenses, you can lower your taxable income while ensuring that your business remains well-equipped, competitive and sustainable.
Travel and Accommodation
When you’re managing taxes as a contractor within a limited company structure, you need to keep track of any travel you do that’s related to your business, as well as accommodation for overnight stays if you’ve had to travel for work. This includes mileage if you’ve driven, train tickets, hotel costs, any food costs and even flights.
Office and Workplace Costs
There’s a lot of overheads when you’re contracting, but office and workplace costs can be included as limited company tax deductions. This includes rent, bills, office supplies; even a portion of your home office costs are deductible if you work from home.
Professional Services
As a contractor with a limited company, you’re bound to pay for some professional services, and these costs can be included in your limited company tax deductions. This includes contractor accountants, legal services and business consultants, all of which can be claimed as allowance expenses.
Training and Development
Courses or certifications directly related to your business activities qualify as allowable expenses, and can be included as tax deductible to reduce your tax liability. Not only does this lower your tax bill, it also makes training and development slightly more affordable.
Equipment and Technology
Regardless of the industry you work in or the services you provide, you’re sure to have a need for equipment and technology in some form. Expenses such as costs for computers, software, tools and other essential equipment are tax-deductible.
FAQ: How Much Should You Pay Yourself?
1. How can I pay myself from my limited company?
As a limited company director, you can pay yourself using:
- A salary (through PAYE)
- Dividends from company profits
- Pension contributions and reimbursed business expenses
Most directors use a salary + dividends strategy for maximum tax efficiency.Go Limited helps you calculate the ideal mix of salary and dividends based on your earnings and goals.
2. What is the best salary to pay myself as a director?
In the 2025/26 tax year:
- The lower earnings limit is £6,396
- The primary NI threshold is £12,570
- Many directors choose a salary of around £9,100 — high enough to qualify for National Insurance credits without triggering NI contributions
Go Limited provides automated payroll and tax optimisation tailored to these thresholds.
3. How do dividends work, and how much tax do I pay on them?
Dividends are paid from after-tax profits. For 2025/26:
- The tax-free dividend allowance is just £500
- Above that, rates are:
8.75% (basic rate)
33.75% (higher rate)
39.35% (additional rate)
Dividends must be properly declared and supported by your accounts. Go Limited helps you issue legal dividends and avoid costly tax missteps.
4. Can I pay myself only in dividends?
Not advisable. Dividends:
- Can only be paid from retained profits
- Don’t count toward state pension eligibility
- Can’t be used if your company makes a loss
You should take a minimum salary to stay compliant and protect your future entitlements. Need help with salary/dividend balance? Go Limited’s experts will guide you.
5. What are the tax benefits of paying a lower salary and more dividends?
- Low salary = Lower PAYE and employee/employer NI
- Dividends = Lower tax rates than standard income
This combo usually increases your take-home pay and lowers your company’s NI costs. Our wage strategy tools at Go Limited model your exact tax savings.
6. Should I pay myself above the NI threshold?
If you pay yourself over £12,570, you’ll start paying personal Income Tax and trigger Employer NI contributions (15% after £5,000).
Some directors still choose this level to use their full tax-free allowance despite the extra NI. Go Limited lets you compare net outcomes and decide what's worth it.
7. What if I pay myself a high salary instead of dividends?
- Pros: Better for mortgage applications and regular income
- Cons: Higher Income Tax and NI, lower tax efficiency
You might opt for a higher salary if your personal needs or lenders require consistent PAYE income. Go Limited supports flexible strategies for financial planning and mortgage readiness.
8. Can my limited company contribute to a pension instead of salary or dividends?
Yes – and it’s highly tax-efficient. Employer contributions:
- Are Corporation Tax-deductible
- Do not count toward salary or dividend income
- Help you build long-term retirement savings
Go Limited connects you with pension advisors who specialise in company contributions.
9. What expenses can I reimburse instead of taking more salary?
Directors can claim:
- Travel and accommodation (not regular commutes)
- Business phone and internet
- Equipment and software
- Home office costs
These reduce your company’s tax bill and don’t affect your personal tax. Our platform helps Go Limited users track and claim expenses correctly – every time.
10. What if I pay myself too much in dividends?
You risk:
- Paying personal tax at higher dividend rates
- Declaring illegal dividends if profits aren’t available
This can lead to HMRC penalties and needing to repay the funds to your company. Go Limited alerts you when dividend payouts exceed legal limits or available profits.
11. Can I adjust my salary and dividends throughout the year?
- Salaries should be consistent for PAYE and HMRC reporting
- Dividends can be flexible and paid periodically, as long as you have sufficient post-tax profits
Go Limited offers flexible accounting support to adapt your pay strategy as profits fluctuate.
12. Where can I get personalised advice on how much to pay myself?
Your ideal wage strategy depends on:
- Your company’s profit levels
- Your personal income needs
- Your tax planning goals
Speaking with an accountant is strongly advised – or better yet, let Go Limited match you with one that specialises in limited company directors.
This article explains how to pay yourself from a UK limited company using a combination of salary and dividends to reduce tax liabilities and remain eligible for benefits. It covers ideal salary thresholds, dividend strategies, tax planning, and allowable expenses—all tailored for contractors and small business owners seeking financial efficiency and compliance.
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
