Moving from sole trader to company brings a change that catches many people out: the money in the bank belongs to the company. This note explains the usual ways of drawing it, using the rates for the 2026/27 tax year.
Not your money yet
A limited company is a separate legal person. Its profits are its own until they are properly paid to you, whether as salary, as a dividend or as a loan. Each has its own tax treatment and its own rules, and owner-directors usually use a combination.
Salary
A salary is run through payroll, even when the director is the only person on it. It is deductible for corporation tax, and it builds up entitlement to the state pension once it reaches the lower earnings limit of £6,708 a year.
A common starting point is a salary at the personal allowance of £12,570. At that level there is no income tax and no employee National Insurance. The company pays employer National Insurance of 15% on earnings above £5,000, which comes to £1,135.50 a year, and both the salary and that National Insurance reduce its corporation tax.
The Employment Allowance of £10,500 can cover that cost for many employers, but not for a company whose only employee paid above the threshold is a single director. Above £12,570, salary starts to carry income tax and National Insurance on both sides, which is why most owners turn to dividends from that point.
Dividends
A dividend is a share of the profits left after corporation tax, paid to shareholders in proportion to their shares. It can only be paid if the company has enough retained profit to cover it. It carries no National Insurance, but it does not reduce corporation tax either.
The first £500 of dividends each year is taxed at nil. Anything above that is taxed according to where it falls in your income, with dividends treated as the top slice.
| Band | Rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
The basic and higher rates each rose by two points in April 2026. As an example, a director with a salary of £12,570 and dividends of £30,000 has £500 taxed at nil and £29,500 at 10.75%, giving a bill of £3,171.25. For a 2026/27 dividend, that falls due through self assessment by 31 January 2028.
Where that bill exceeds £1,000, HMRC will usually ask for payments on account towards the following year too, so the first bill can be half as big again as people expect.
The paperwork
Dividends need to be declared properly at the time, not reconstructed at the year end. For each one there should be a board minute, and a voucher for each shareholder showing the date, the amount and the name of the company. Before declaring one, the directors should look at up-to-date figures to satisfy themselves that the profits are there.
A dividend paid without enough distributable profit is unlawful and may have to be repaid. Money taken with no paperwork at all tends to be treated as a loan, or even as salary, and neither is usually what the director intended.
The director’s loan account
This is the running account between you and your company. Money you put in is a credit, and the company can repay it to you tax-free. Money you take out which is neither salary nor a dividend makes the account overdrawn, which means you owe the company.
Three rules matter if it is overdrawn:
- If the balance is not repaid within nine months and a day of the company’s year end, the company pays a temporary tax on it under section 455. The rate is 35.75% for loans made on or after 6 April 2026, and 33.75% for earlier ones. It is reclaimable after the loan is repaid, but only some time later.
- Repaying a loan and borrowing again shortly afterwards does not work. Where £5,000 or more is repaid and re-drawn within 30 days, the repayment is generally matched to the new loan and ignored. There are similar rules for larger balances where the intention to re-borrow is clear.
- If the loan exceeds £10,000 at any time in the tax year and little or no interest is charged, it is normally a taxable benefit. It goes on a P11D, and the company pays Class 1A National Insurance.
Pensions
An employer pension contribution paid directly by the company is the often forgotten fourth route. It normally reduces corporation tax, and carries neither income tax nor National Insurance, subject to your annual allowance, which is generally £60,000, and to the contribution being reasonable for the work you do. The price is that the money is out of reach until pension age.
Putting it together
There is no single right answer. The best mix depends on the company’s profits, your other income, your plans and whether other family members hold shares. The sums are worth doing once a year, a few months before both the company’s year end and 5 April, while there is still something you can change.
Written for general guidance on the rules as they stood in November 2026, covering the 2026/27 tax year. Tax depends on individual circumstances and the rules change, so please take advice before acting on anything here.