Paying directors and owners in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Most owner-directors in the UK pay themselves a combination of a low salary and dividends — keeping the salary around the National Insurance threshold to preserve state pension entitlement while taking additional income as dividends, which are taxed differently and attract no National Insurance.
Why the salary-dividend split is popular
Directors are classed as office holders, which means they are employees for PAYE and National Insurance purposes even if they own the company. That distinction matters because it determines which rules apply to how you take money out.
National Insurance is where the salary-dividend split earns its efficiency. Employer National Insurance runs at 13.8% on earnings above the secondary threshold, and employee National Insurance runs at 8% up to the upper earnings limit, then 2% above it. Dividends sit outside National Insurance entirely. Taking a large salary therefore generates a significant combined NI cost that a salary-dividend structure avoids.
The salary is still worth having. Even a modest director's salary, kept around the primary threshold, creates a qualifying year for the state pension without triggering an actual NI liability. Your accountant or payroll provider can confirm the precise threshold figures for 2026/27, as these are set in the annual Budget.
Running payroll for a director
Directors are employees in HMRC's eyes, so the company must run PAYE for any salary paid. That means:
- Registering as an employer with HMRC before the first payroll run
- Submitting a Full Payment Submission (FPS) on or before each payday under Real Time Information (RTI)
- Issuing a P60 by 31 May after each tax year end
- Reporting any benefits in kind on a P11D by 6 July
One important technical point: directors can use an annual earnings period for National Insurance rather than the standard weekly or monthly period. This means the NI calculation is based on total annual earnings rather than each pay period individually. In practice this allows a director to take an uneven salary — perhaps nothing for most of the year and a larger amount before the year end — without triggering an NI liability as long as the annual total stays within the threshold. Your payroll software needs to be configured correctly for this, as the default is often a standard earnings period.
Dividends: what employers need to understand
Dividends are paid from post-tax company profits. They are not a business expense, so the company does not get a tax deduction for them, and they do not appear in the payroll. Each shareholder-director receives dividends in proportion to their shareholding, unless the company has alphabet shares structured to allow flexibility.
Dividends are taxed on the recipient's personal tax return at dividend-specific rates. The income tax personal allowance (£12,570 in 2026/27) applies across all income including dividends, and there is a dividend allowance on top of that before dividend tax rates kick in. The exact allowance figure for 2026/27 should be confirmed with your accountant, as it has changed in recent years.
Dividends must be formally declared by the board, and the company must have sufficient distributable reserves — retained profits after tax — to cover them. Paying a dividend when the company has no distributable reserves makes it an unlawful dividend, which the director may have to repay. Keep board minutes and dividend vouchers for every distribution, even if you are the sole director and shareholder.
Pension contributions for directors
Auto-enrolment rules apply to directors differently depending on whether they have an employment contract. A sole director with no contract of employment is typically exempt from auto-enrolment. A director who has a written contract of employment and meets the age and earnings criteria must be assessed and enrolled just like any other employee, with employer contributions of at least 3% and employee contributions of at least 5% of qualifying earnings.
Many directors choose to make employer pension contributions directly from the company regardless, because employer pension contributions are a legitimate business expense that reduces corporation tax. This can be a tax-efficient alternative to a higher salary.
Employment Rights Act 2025 and director-employees
The Employment Rights Act 2025 strengthened day-one employment rights for workers and employees. For directors who are genuinely office holders with no employment contract, most of those rights do not apply in the same way. However, if a director also holds a separate service contract as an employee — which is common in larger owner-managed businesses — they can accrue the same statutory rights as any other employee, including statutory sick pay and family-related leave pay. It is worth being clear about the structure from the outset to avoid ambiguity.
Practical steps to get this right
Keep the payroll and dividend records separate and clean. Run a proper payroll for the director's salary, submit RTI on time, and document every dividend with a board resolution and voucher. Work with an accountant to confirm the most tax-efficient salary level each April when new thresholds take effect. If the company grows and other shareholders are involved, revisit the share structure to make sure dividend flexibility still works as intended.
---
Run HR and payroll in United Kingdom with Mellow
Mellow brings HR, payroll and 12 AI agents into one platform — built to handle United Kingdom properly, with payroll included, from £4 per employee per month. The AI agents don't just answer questions; they generate contracts, run cost estimates and draft letters for you.
- United Kingdom payroll software
[Start a free trial →](/register)