Most guides on paying yourself from a limited company assume your business is turning over six figures. They talk about the full £50,270 basic rate band, the £12,570 salary, and dividends up to the higher rate threshold. That is all well and good if you have the profit.
But what if your company earns under £20,000 a year? What if you are a new contractor who has just started out, a part-time director building a side business, or a sole trader who incorporated but has not yet grown the revenue?
The standard advice does not fit. And if you follow it blindly, you can actually lose money on payroll costs you cannot afford.
This article covers how to pay yourself from a limited company when profits are low. We use real numbers for 2025/26 and work through three common scenarios.
Why the Standard Salary and Dividend Strategy Falls Apart Below £20,000
The classic director pay strategy is a salary of £12,570 (the personal allowance and primary NI threshold) and then dividends up to the basic rate band. The salary is deductible against corporation tax, and the dividends use the £500 dividend allowance plus the 8.75% basic rate.
That works well when your company has £60,000 or more of profit. The corporation tax saving on the salary is real. The dividend tax is manageable.
But when profit is under £20,000, the maths changes. You have to ask whether the corporation tax saving on the salary is actually worth the cash leaving the business. And you have to consider whether the company can afford the employer National Insurance on a salary above the secondary threshold.
Here is the key number. The secondary threshold for employer NI in 2025/26 is £9,100. Any salary above that triggers 13.8% employer NI. A £12,570 salary means £3,470 of salary is subject to employer NI. That is £479 in employer NI alone. Plus you have payroll software costs, pension auto-enrolment duties if you cross the earnings threshold, and the administrative hassle.
If your company profit is £15,000, paying a £12,570 salary leaves only £2,430 of profit. The corporation tax saving on the salary is 19% of £12,570, which is £2,388. But you have just paid £479 in employer NI. Your net corporation tax saving after employer NI is £1,909. And you have taken £12,570 out of the business in cash. Is that worth it?
In many cases, the answer is no. You are better off keeping cash in the company and taking a smaller salary, or taking no salary at all and relying on dividends if you have retained profits from a prior year.
Scenario 1: A New Limited Company with £12,000 Profit in Year One
You incorporated in January 2025. Your first year of trading ends 31 December 2025. Profit after expenses is £12,000. You have no retained profits from prior years.
You cannot pay a dividend because the company has no distributable profits. Under the Companies Act 2006, a dividend can only be paid from retained earnings. If you have made £12,000 profit in year one but have not yet filed your accounts, you can declare an interim dividend based on the management accounts showing that profit. But you need to be careful. If you over-declare and the company later makes a loss, the dividend is unlawful.
So in this scenario, you are limited to salary. What do you do?
Option A: Pay the full £12,570 salary. You cannot. The company only has £12,000 profit. A £12,570 salary would create a loss of £570. That is legal, but the company then has negative retained earnings. You cannot pay a dividend in the future until that loss is recovered. And you pay employer NI on the amount above £9,100. The employer NI on £3,470 is £479. So the total cost to the company is £13,049. You receive £12,570 gross. No income tax or employee NI because it is within the personal allowance and primary threshold. But the company is now overdrawn.
Option B: Pay a salary of £9,100. This is the secondary threshold. No employer NI is due. The company pays you £9,100. Corporation tax saving at 19% is £1,729. Net cost to the company after corporation tax saving is £7,371. You receive £9,100 gross. No tax or NI. The company retains £2,900 profit, which can be used for a future dividend.
Option C: Pay a salary of £6,000. No employer NI. Corporation tax saving of £1,140. Net cost to company is £4,860. You keep more cash in the business for growth. You receive £6,000 tax-free.
For a new company with £12,000 profit, Option B is usually the best balance. You take a salary that avoids employer NI, you get the corporation tax saving, and you leave enough profit in the company to pay a small dividend in year two once you have filed your accounts and confirmed retained earnings.
Scenario 2: A Side-Hustle Ltd with £8,000 Profit and a Full-Time Job
You run a limited company on the side of your main employment. Your company makes £8,000 profit in the year. You already use your full personal allowance against your main job salary.
In this case, any salary from the Ltd company is taxed at your marginal rate. If you are a basic rate taxpayer, that is 20% income tax plus employee NI at 8% (on earnings above £12,570 from all sources combined). If you are a higher rate taxpayer, it is 40% plus 2% employee NI.
A £9,100 salary from the Ltd company would cost the company £9,100 (no employer NI because it is at the secondary threshold). But you would pay income tax and NI on it because it is on top of your main job income. At basic rate, you lose about 28% to tax and NI. You keep about £6,552 net. The corporation tax saving at 19% is £1,729. So the net cost to the company is £7,371, and you receive £6,552. That is a net loss of £819. You are worse off than if the company simply kept the profit and you paid yourself nothing.
What should you do instead? Take no salary. Keep the £8,000 profit in the company. Pay corporation tax at 19% (£1,520). The company retains £6,480 after tax. In a future year when you have more profit, or when you leave your main job, you can pay a dividend from those retained earnings. Dividends are taxed at 8.75% for basic rate, 33.75% for higher rate. That is likely lower than your marginal income tax rate on a salary.
Alternatively, if you need the cash now, take a small dividend. But only if the company has distributable profits from a prior year or from the current year confirmed by management accounts. A £6,480 dividend would use the £500 dividend allowance, then the remaining £5,980 is taxed at 8.75% if you are a basic rate taxpayer. That is £523 in dividend tax. You keep £5,957. Compare that to the salary route where you kept £6,552 but the company spent £9,100. The dividend route leaves more cash in the company overall.
For a side-hustle Ltd, the answer is almost always: no salary, retain profit, pay a dividend when the personal circumstances change.
Scenario 3: A Husband and Wife Ltd Making £18,000 Profit
You and your spouse are joint directors and 50/50 shareholders of a limited company running a small consultancy from your home in Birmingham's Jewellery Quarter. The company makes £18,000 profit.
You can pay each of you a salary of £9,100. That totals £18,200. But the company only has £18,000 profit. You would create a small loss of £200. That is fine, but it means no retained profit for dividends.
The salaries cost the company £18,200. No employer NI because each salary is at the secondary threshold. Corporation tax saving at 19% is £3,458. Net cost to company after tax saving is £14,742. Each of you receives £9,100 gross. No tax or NI if you each have no other income, or if the salary sits within your personal allowance.
If you each have other income that uses your personal allowance, the salary is taxed at your marginal rate. In that case, the same logic from Scenario 2 applies. You might be better off paying no salaries and retaining the profit.
But if you have no other income, this is a clean strategy. You extract the full profit tax-free through salaries, the company saves corporation tax, and you have no employer NI. The only downside is that you have no retained profit for future dividends. But if the company continues to earn similar profit each year, you repeat the same strategy.
What About the Employment Allowance?
The Employment Allowance lets eligible employers reduce their employer NI by up to £10,500 in 2025/26. If your company is a single-director Ltd with no other employees, you cannot claim the Employment Allowance. The rules exclude companies where the director is the only employee paid above the secondary threshold.
If you have two directors and both are paid above £9,100, you can claim the Employment Allowance. That wipes out the employer NI on the salaries. In Scenario 3, the Employment Allowance would cover the employer NI on any salary above £9,100 for both of you. So you could pay each of you £12,570 and the company would pay no employer NI (up to the £10,500 cap). That extracts more cash tax-free.
But again, the company only has £18,000 profit. Paying two salaries of £12,570 totals £25,140. That creates a loss of £7,140. That is legal, but it means the company has negative retained earnings. You cannot pay dividends in future until that loss is recovered. And the company has no cash left for reinvestment.
If you are confident the company will earn more next year, the loss can be carried forward against future profits. But if the business is uncertain, stripping out all cash is risky.
What If You Have Retained Profits from Prior Years?
If your company has retained profits from a previous year, you have more flexibility. You can pay a dividend without worrying about the current year profit.
For example, your company made £25,000 profit last year and you paid £10,000 salary. Retained earnings are £15,000 after corporation tax. This year the company makes only £5,000 profit. You can still pay a dividend of up to £15,000 from retained earnings, as long as the management accounts show sufficient distributable reserves.
Dividends are not deductible against corporation tax, so the company pays tax on its £5,000 profit at 19% (£950). You pay dividend tax on the dividend at your personal rate, using the £500 dividend allowance first.
This is often the most tax-efficient way to extract cash from a low-profit year if you have retained profits. You avoid employer NI entirely, and the dividend tax rates are lower than income tax rates for most people.
What About Pension Contributions?
If your company has low profit but you want to save for retirement, a direct company pension contribution is worth considering. The contribution is deductible against corporation tax, and there is no NI on it. You can contribute up to £60,000 per year (subject to the annual allowance) and the company gets the full corporation tax saving.
For a company with £15,000 profit, a £15,000 pension contribution would reduce profit to zero. Corporation tax is £0. The company saves £2,850 in corporation tax. You get £15,000 into your pension. You cannot access it until age 57 (rising to 58), but it is a highly tax-efficient way to extract value from a low-profit company if you do not need the cash now.
The trade-off is that you cannot use the money for living expenses. So this only works if you have other income or savings to live on.
Summary: The Decision Framework for Low-Profit Companies
Here is a simple framework for deciding how to pay yourself from a limited company when profits are under £20,000.
Step 1: Check if the company has distributable retained profits from prior years. If yes, consider a dividend. No employer NI, lower tax rates, and you keep cash in the company for growth.
Step 2: If no retained profits, consider a salary at or below the secondary threshold of £9,100. This avoids employer NI and gives you a corporation tax saving. It is clean and simple.
Step 3: If you have no other income and the company can afford it, a salary up to £12,570 is fine. But be aware of the employer NI cost and the impact on retained earnings.
Step 4: If you have other income that uses your personal allowance, avoid salary from the Ltd company. Retain the profit and take a dividend in a future year when your personal circumstances change, or when the company has more profit.
Step 5: If you do not need the cash now, consider a company pension contribution. It is the most tax-efficient route but locks the money away until retirement.
Every situation is different. The right answer depends on your total income, your personal tax position, your cash needs, and your long-term plans for the business. If you are unsure, speak to an ICAEW qualified accountant who can run the numbers for your specific circumstances.
If your company is about to cross the £90,000 VAT threshold, that changes the planning entirely. Read our guide on VAT and Making Tax Digital to understand the implications.
For more on the fundamentals of director pay, including the full salary and dividend strategy for profitable companies, see our fundamentals page.