One of the most common questions from UK SME owners — and one that has both a tax answer and a commercial answer. Here is how to approach both.
The question of how much to pay yourself as a UK small business owner has two distinct answers: what is tax-efficient, and what can the business actually afford to sustain. Most advice focuses on the first. The second is equally important and often overlooked.
For limited company directors, the standard approach to minimising tax and NI is to take a low salary (typically at or just above the NI secondary threshold) and top up with dividends from retained profit. This works because dividends are taxed at lower rates than salary and attract no National Insurance.
Step 1 — Salary at the NI threshold: Take a salary of £9,100 per year (£758/month). This is at the employee NI threshold — you pay no employee NI, and the company pays no employer NI (the secondary threshold is £5,000 from April 2025, so there is technically some employer NI at the £9,100 level). Alternatively some directors take salary at £12,570 (personal allowance) to use the full income tax-free allowance.
Step 2 — Dividends from profit: Take the remainder of your income as dividends. The dividend allowance is £500 in 2025/26. Above this, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
The tax-efficient structure tells you how to extract money. The commercial question is how much money is available to extract without damaging the business. This requires understanding three numbers:
1. Net profit after your commercial salary. Model your salary as a business cost at market rate for your role. If you were hiring someone to do your job, what would you pay them? That is the commercial cost of your labour — and it should be reflected in the P&L before calculating profit.
2. Cash runway. After your drawings, does the business maintain at least 6-8 weeks of fixed costs as a minimum cash reserve? If drawings are reducing the cash buffer below this level, the business is being undercapitalised.
3. Reinvestment requirements. Does the business need to reinvest capital for growth, equipment replacement, or working capital? Drawings that compete with reinvestment requirements constrain the business's ability to grow.
Calculate your business's monthly net profit (after all costs including a notional market-rate salary for your role). The amount available for drawings is: net profit minus minimum cash reserve requirement minus planned reinvestment. If this number is negative, the business is not yet generating enough profit to sustain your required income — which is the most important commercial insight this calculation can produce.
The LumixAI 12-Month P&L tool models profit with your salary included as a cost, so you can see exactly what the business generates before and after your drawings — and whether the numbers are sustainable.
The most common approach is a salary of £9,100 (at the NI secondary threshold) or £12,570 (using the full personal allowance) with dividends on top. The optimal amount depends on your specific tax position — take advice from your accountant.
Calculate net profit with your full desired salary included as a business cost. If the business is profitable after that salary, it can afford it. If not, either the business needs to generate more profit or the salary needs to reduce to what the business can sustain.
For most limited company directors, a combination of low salary and dividends is more tax-efficient than salary alone. But the right split depends on your income level, other income sources, and business profitability. Your accountant should advise on your specific structure.
There is no single answer — it depends on the business size, profitability, and sector. The commercial test is whether the business generates sustainable net profit with your salary included as a cost at a market rate for your role. If it does not, margin improvement is needed before drawings increase.
The LumixAI P&L tool shows your profit before and after your salary — so you can see exactly what the business can sustain.
Model your business profitability →