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.

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You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

Contractor reviewing salary and dividends from limited company

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.

UK tax strategy breakdown for limited company directors

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.

limited company tax advantages


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.


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Financial planning for small UK limited companies

Go Limited FAQs: Is a Limited Company Right for You?

1. What does it actually mean to ‘go limited’?

Going limited means forming a limited company, where you act as a director and shareholder of a separate legal entity. This company:

  • Pays its own tax
  • Signs its own contracts
  • Keeps business finances separate from your personal ones
  • This structure offers greater control and potential tax advantages, but also comes with more admin and legal duties.

Go Limited makes setting up and managing a limited company easy – even if you’ve never done it before.

2. Is a limited company more tax-efficient than being self-employed or using an umbrella company?

It can be, especially if you:

  • Earn £35,000+ per year
  • Work outside IR35
  • Are happy to manage (or outsource) some admin
  • You can take a small salary and pay the rest as dividends, which are taxed at lower rates. However, recent changes – like the £500 dividend allowance and Corporation Tax rising to 25% for some – mean the savings margin is smaller.

3. How does IR35 affect my decision to go limited?

IR35 rules determine if you’re truly self-employed or working like an employee. If:

  • You're inside IR35, you'll be taxed like an employee
  • You're outside IR35, you retain the tax benefits of a limited company
  • Post-2021, clients often decide your IR35 status, so contracts and working practices need to be carefully managed.

With Go Limited, you get IR35 assessments, contract reviews, and guidance on staying compliant.

4. What responsibilities will I have as a limited company director?

As a director, you must:

  • File annual accounts with Companies House
  • Submit Corporation Tax returns
  • Handle payroll
  • Submit an annual Confirmation Statement
  • Keep accurate records
  • Pay yourself legally via salary and dividends

Go Limited’s accounting partners handle this for you – so you can focus on work, not admin.

5. Is it worth going limited for short-term or part-time contracting?

Not always. If you:

  • Earn under £30,000
  • Work occasionally or inside IR35

Then a sole trader or umbrella company may be simpler and more cost-effective.

6. What if I’m caught by IR35 but still have a limited company?

You’ll likely be paid under PAYE by your client, meaning:

  • Fewer tax benefits
  • Reduced flexibility in how you pay yourself

In this case, some people pause or close their limited company and use an umbrella instead – but keep the company dormant for future contracts. Go Limited can help you switch between models without hassle – and keep your company ready when you need it.

7. Can I still claim business expenses through my limited company?

Yes – and more than you can as a sole trader or umbrella worker. Legitimate business expenses can reduce your Corporation Tax, including:

  • Laptops, software, and office equipment
  • Travel (not your regular commute)
  • Insurance, accountancy, and training

Keep receipts and claim only what's “wholly and exclusively” for business use. Go Limited’s tools and accountants help you claim confidently and correctly.

8. Are limited companies being targeted more by HMRC?

Yes, especially around:

  • IR35 status
  • Dividend payments
  • Misclaimed expenses

This doesn't mean you’re doing anything wrong – but it does mean you need to stay compliant.Go Limited helps you build a compliant company structure from day one, reducing HMRC risk.

9. How much does it cost to run a limited company?

Typical annual costs:

  • Accountant: £80–£150/month
  • Companies House fee: £15/year
  • Business insurance: from £100/year
  • Payroll, software, and bank fees may apply

Most of these costs are offset by tax savings – if your setup is right. Go Limited offers affordable accounting packages tailored for contractors, consultants, and freelancers.

10. Can I switch between limited and umbrella based on contracts?

Yes – many professionals do. For example:

  • Use a limited company for outside IR35 roles
  • Switch to an umbrella company for short or inside IR35 contracts

You can even keep your limited company dormant between gigs. Go Limited helps manage transitions seamlessly so you stay compliant and maximise take-home pay.

11. How do I know if going limited is right for me?

Ask yourself:

  • Am I consistently outside IR35?
  • Am I earning £35,000+ per year?
  • Am I open to (or outsourcing) admin?

Do I want flexibility and long-term financial control?

If you’re mostly saying yes, going limited could be the right move.

Still not sure? Go Limited offers tailored advice and free consultations to help you make the right call.

personal service company

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.

Speak to a Specialist

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