Why Paying a Salary Is Advisable for Limited Company Owners

Many small limited company owners ask whether they should pay themselves a salary, dividends, or a mixture of both.

The answer depends on your circumstances, but in many cases, paying a salary is still advisable.

This is because salary can help protect your National Insurance record, support your State Pension entitlement, reduce company profits for Corporation Tax purposes, and form part of a sensible profit extraction strategy.

A limited company is separate from you

A limited company is a separate legal entity.

This means that the money earned by the company belongs to the company, not personally to the director or shareholder.

You can usually take money from your company in different ways, including:

• salary;

• dividends;

• expense reimbursements;

• repayment of money you have lent to the company;

• or, in some cases, a director’s loan.

These are not all treated in the same way for tax.

HMRC confirms that salary payments must be dealt with through the employer system, with Income Tax and National Insurance dealt with through payroll. Dividends are different: they are paid to shareholders from company profits and cannot be counted as business costs for Corporation Tax.

Why salary can be useful

Paying a salary can be useful for three main reasons.

Firstly, salary can help protect your National Insurance record.

Your National Insurance record affects your entitlement to the State Pension. You normally need at least 10 qualifying years to receive any new State Pension, and if your National Insurance record started after April 2016, you usually need 35 qualifying years to receive the full new State Pension.Secondly, salary can reduce company profits.

Unlike dividends, salary is normally an allowable company cost, provided it is properly processed and relates to work done for the company. This means it can reduce the company’s taxable profit before Corporation Tax is calculated.

Thirdly, salary can be part of a tax-efficient profit extraction plan.

Many small company owners use a mixture of salary and dividends. Salary is employment income. Dividends are paid to shareholders from company profits. The right balance depends on your income, company profits, other income sources, National Insurance position and whether the company can claim Employment Allowance.

Dividends do not count for National Insurance

This is an important point.

Dividends do not count as earnings for National Insurance. HMRC’s National Insurance Manual confirms that directors receive dividends as shareholders, not as directors, and that dividends are not earnings for National Insurance purposes.

This means that if you only take dividends and no salary, you may not be building up a qualifying year for State Pension purposes unless you have another source of National Insurance contributions or credits.

For example, you may already have another employment, receive certain National Insurance credits, or have enough qualifying years already. But this should be checked rather than assumed.

Key 2026/27 National Insurance thresholds

For 2026/27, the key Class 1 National Insurance thresholds are:

• Lower Earnings Limit: £6,708 per year;

• Primary Threshold: £12,570 per year;

• Secondary Threshold: £5,000 per year.

The Primary Threshold is the point where employees usually start paying employee National Insurance.

The Secondary Threshold is the point where the company usually starts paying employer National Insurance.

For 2026/27, most employees pay employee National Insurance at 8% on earnings between £12,570 and £50,270, and 2% above that.

For employer National Insurance, the main rate for many employees and directors is 15% above the Secondary Threshold. HMRC also confirms that employer National Insurance applies to directors’ salaries, even where the director runs their own company and is the only employee.

Why the Lower Earnings Limit matters

For 2026/27, employees with earnings between the Lower Earnings Limit of £129 per week and the Primary Threshold of £242 per week are treated as having paid Class 1 National Insurance, even though there is no actual employee National Insurance to pay.

This is why paying yourself at least the Lower Earnings Limit can be useful.

It can help protect your National Insurance record without creating employee National Insurance, provided the salary is processed correctly through payroll.

Does the company need a PAYE scheme?

Yes, in most cases.

If your company pays you a salary, it will usually need to register as an employer and operate PAYE.

HMRC says you must register as an employer even if you are only employing yourself, for example as the only director of a limited company. You must register before the first payday, and you cannot register more than two months before you start paying people.

A salary should not simply be recorded after the year end if it has not been processed properly through payroll.

If money is taken from the company and it is not salary, dividend, expense reimbursement or loan repayment, it may need to be treated as a director’s loan. HMRC confirms that money taken out of a company which is not salary or dividend and is more than the director has put in is a director’s loan.

What salary level should a director consider?

There is no single answer that works for everyone.

However, for many small company directors, two salary levels are often considered.

Option 1: Salary of £6,708

For 2026/27, a salary of £6,708 is equal to the annual Lower Earnings Limit.

This can be useful where:

• the director has no other income or credits;

• the director wants to protect their National Insurance record;

• the company cannot claim Employment Allowance;

• and the aim is to keep employer National Insurance as low as possible.

At this salary level, there should usually be no employee National Insurance because the salary is below the Primary Threshold of £12,570.

However, because the salary is above the employer Secondary Threshold of £5,000, the company will normally pay employer National Insurance.

The calculation is:

£6,708 - £5,000 = £1,708

£1,708 × 15% = £256.20

So, where Employment Allowance is not available, employer National Insurance of approximately £256.20 will be payable.

Option 2: Salary of £12,570

A salary of £12,570 may also be considered.

This uses the standard Personal Allowance and is also equal to the Primary Threshold for employee National Insurance for 2026/27.

Assuming the director has the standard tax code and no other income affecting the Personal Allowance, there may be no Income Tax and no employee National Insurance on this salary.

However, the company will normally pay employer National Insurance on the amount above the Secondary Threshold if Employment Allowance is not available.

The calculation is:

£12,570 - £5,000 = £7,570

£7,570 × 15% = £1,135.50

So, where Employment Allowance is not available, employer National Insurance of approximately £1,135.50 will be payable.

The salary and the employer National Insurance should normally be allowable company costs, which can reduce Corporation Tax. This means the true cost to the company should be considered after the Corporation Tax saving.

What about Employment Allowance?

Employment Allowance allows eligible employers to reduce their annual employer National Insurance liability.

For 2026/27, Employment Allowance is £10,500.

However, not every company can claim it.

A company with only one director cannot claim Employment Allowance if that director is the only employee liable for secondary Class 1 National Insurance.

This means many one-director companies cannot use Employment Allowance to cover the employer National Insurance on the director’s salary.

The position may be different where the company has other employees, or more than one director, but eligibility should always be checked.

Worked example: sole director with no other income

Emma is the sole director and shareholder of her limited company.

She has no other employment income and no other National Insurance credits.

If Emma takes only dividends and no salary, she may not build a qualifying year for State Pension purposes.

Instead, Emma decides to pay herself a salary of £6,708 for 2026/27.

This means:

• the salary is above the Lower Earnings Limit;

• it is below the Primary Threshold, so no employee National Insurance is due;

• it is within the Personal Allowance, so no Income Tax should be due if she has no other income affecting her tax code;

• the company pays employer National Insurance of approximately £256.20;

• the salary must be reported through PAYE;

• and the salary and employer National Insurance should normally reduce the company’s taxable profits.

Emma can then consider dividends from the company’s available profits, after Corporation Tax and subject to the usual dividend rules.

When might a salary not be needed?

A salary may not be necessary in every case.

For example, a director may already have another job where they are building up National Insurance qualifying years.

They may already receive National Insurance credits, for example through certain benefits or caring responsibilities.

They may already have enough qualifying years for State Pension purposes.

Or they may be above State Pension age, in which case the National Insurance position is different.

This is why salary planning should be reviewed based on the director’s full personal circumstances, not just the company position.

Common mistakes to avoid

Small company owners should avoid:

• taking dividends only without checking their National Insurance record;

• assuming dividends count towards State Pension entitlement;

• paying salary without registering for PAYE;

• recording salary after the year end without payroll submissions;

• ignoring employer National Insurance;

• claiming Employment Allowance when the company is not eligible;

• assuming the same salary level is best for every director;

• and taking money from the company without properly recording whether it is salary, dividend, expense repayment or director’s loan.

Final thoughts

For many company owners below State Pension age, paying a salary is advisable.

It can help protect your National Insurance record, support State Pension entitlement and reduce company profits for Corporation Tax purposes.

But the salary must be processed correctly through PAYE.

The right salary level depends on your personal income, your National Insurance position, the company’s profits, and whether Employment Allowance is available.

The key questions are:

Do you need to protect your National Insurance record?

Is the salary being reported through PAYE?

Is Employment Allowance available?

What is the overall tax position when salary and dividends are considered together?

This is why Busy Bee exists.

We help small limited company owners stay compliant, tax efficient and in control of their business finances.

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Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.