Every agency founder I meet asks the same question within the first fifteen minutes: "What should I pay myself?"
It is the most common question we get at Agency Founder Finance, and the answer is rarely simple. The right structure depends on your agency's profitability, your personal tax position, and your plans for the business. But there is a standard starting point that works for most limited company agency founders.
You take a small salary up to the National Insurance threshold, then take the rest as dividends. This is the most tax-efficient way to pay yourself as an agency founder in the UK. Here is why, and how it works in practice for 2025/26.
Why Not Just Take a Salary?
If you are a director of your own limited company, you can pay yourself a salary. It is straightforward. You run it through payroll, HMRC gets its PAYE and National Insurance, and you get a payslip.
But salary is expensive. For every £1,000 you pay yourself as salary above the secondary threshold, the company pays 13.8% employer National Insurance. That is £138 on top. You then pay employee NI at 8% on earnings above £12,570, plus income tax at 20%, 40%, or 45% depending on your total income.
Dividends avoid National Insurance entirely. The company pays no NI on dividends. You pay no NI on dividends. There is just dividend tax, which starts at 8.75% for basic rate taxpayers.
That is the core reason the salary-and-dividends model exists. It saves thousands of pounds in National Insurance every year.
The Standard Structure for 2025/26
Here is the typical setup we recommend for a limited company agency founder with profits of, say, £120,000 per year.
Salary: £12,570 per year
- This is the primary threshold for National Insurance.
- You pay no employee NI and no income tax on this amount.
- The company pays no employer NI because it is below the secondary threshold.
- It counts as a business expense, reducing corporation tax.
- It builds your National Insurance record for state pension and benefits.
Dividends: up to the basic rate band
After the salary, you have roughly £37,700 of the basic rate band remaining (the band runs from £12,571 to £50,270). You can take dividends up to that amount. The first £500 of dividends is tax-free (the dividend allowance). The rest is taxed at 8.75%.
Dividends: above the basic rate band
If you need more than £50,270 in total income, the dividends above that are taxed at 33.75%. Many founders stop at the basic rate threshold and leave the rest in the company, reinvesting it into growth or taking it later in a lower-income year.
Worked Example: A 12-Person Digital Agency Billing £800k
Let us run the numbers for a real scenario. Your agency turns over £800,000. After salaries for your team, rent, software, and other costs, the company makes £140,000 profit before your own pay.
Option A: All salary
- Salary: £140,000
- Employer NI: £17,574
- Employee NI: £6,034
- Income tax: £45,432
- Your take-home: £88,534
- Total tax and NI: £69,040
Option B: Salary plus dividends (standard model)
- Salary: £12,570
- Dividends: £127,430
- Employer NI: £0
- Employee NI: £0
- Income tax on salary: £0
- Dividend tax (basic rate portion £37,200 at 8.75%): £3,255
- Dividend tax (higher rate portion £89,730 at 33.75%): £30,284
- Your take-home: £106,461
- Total tax: £33,539
The difference is stark. You keep nearly £18,000 more per year by using the salary-and-dividends structure. And the company saves £17,574 in employer NI. That is real money you can reinvest in the agency.
Now, the dividend tax on the higher rate portion is painful. That is why many founders cap their total drawings at the basic rate threshold. They take £50,270 total, pay just £3,255 in dividend tax, and leave the remaining profit in the company.
Dividend Tax Rates for 2025/26
Here are the current rates, which apply from April 2025:
- Dividend allowance: £500 (down from £1,000 in 2024/25, and £2,000 before that)
- Basic rate taxpayers: 8.75% on dividends above the allowance
- Higher rate taxpayers: 33.75%
- Additional rate taxpayers: 39.35%
The dividend allowance has been cut significantly. Two years ago it was £2,000. Now it is £500. That means more of your dividends are taxed. But even with the allowance at £500, the structure still beats taking a full salary.
When Salary Makes Sense Beyond the Threshold
There are specific situations where paying a higher salary is the right call. Do not assume the minimum salary is always best.
You need to maximise pension contributions. If you want to put £60,000 into your pension this year, the company can pay that as an employer contribution. It is tax-deductible and no NI is due. But if you also need to take cash, the salary floor still applies.
You have no other income and want to use the personal allowance fully. If your agency is not yet profitable, you might take a salary up to £12,570 to use your personal allowance without paying tax. Dividends would use the same allowance, but salary builds your NI record.
You are claiming certain state benefits. If you need to qualify for maternity allowance, statutory maternity pay, or contribution-based jobseeker's allowance, you need enough NI contributions. A salary of £12,570 per year is usually sufficient, but check your specific situation.
Your agency is loss-making. If the company has no distributable profits, you cannot legally pay dividends. You must take a salary (or a directors' loan). Paying a salary in a loss-making period is common, but be aware it increases the loss.
How Dividends Work Legally
Dividends are not automatic. You cannot just transfer money from the company bank account to your personal account and call it a dividend. There are legal requirements.
The company must have sufficient distributable reserves. These are retained profits from the profit and loss account. If you pay a dividend when the company has no profits, it is an illegal dividend. HMRC can treat it as a directors' loan, and you could face a tax charge at 33.75% under Section 455.
You must hold a board meeting (even if you are the only director) and minute the dividend declaration. You issue a dividend voucher to yourself. The voucher shows the date, the amount, and your shareholding. You keep it in the company records.
Dividends must be paid proportionally to shareholdings. If you own 100% of the shares, you take 100% of the dividend. If you have a co-founder with 40%, they get 40%. You cannot pay yourself a larger dividend than your shareholding entitles you to.
This is where having an experienced accountant matters. We handle the paperwork and ensure everything is compliant. A single mistake on dividend documentation can cost you thousands in HMRC penalties.
Directors' Loan Account: The Trap to Avoid
Many agency founders treat the company bank account as their own. They pay personal bills from the company card, transfer money for a holiday, and sort it out at year-end. This creates a directors' loan account balance.
If the loan exceeds £10,000 at any point, it becomes a benefit in kind. You must report it on a P11D, and the company pays Class 1A NI at 13.8%. If the loan is not repaid within nine months of the year-end, the company pays Section 455 tax at 33.75% on the outstanding amount. That tax is refundable when the loan is repaid, but it ties up cash.
The simple rule: do not take money from the company unless it is a properly documented salary, dividend, or expense reimbursement. If you need to borrow from the company, speak to your accountant first.
What About a Spouse or Partner?
If your spouse or partner works in the agency, paying them a salary is straightforward. They are an employee. You run payroll, pay them the market rate for their role, and it is a legitimate business expense.
If they do not work in the agency but you want them to receive dividends, you need to give them shares. This is common. Many founders issue shares to their spouse to use their personal allowance and basic rate band, reducing the overall tax bill.
But HMRC watches for "settlements" where the founder effectively transfers income to a spouse without a genuine transfer of capital. If the spouse has no real involvement in the business and the shares were issued purely for tax avoidance, HMRC can challenge the arrangement under the settlements legislation (ITTOIA 2005, Part 5, Chapter 5).
We see this work well when the spouse is genuinely involved, even part-time. If they handle the bookkeeping, client communications, or admin, it is defensible. If they hold shares but do nothing, it is risky.
For more on this, read our guide on salary and dividends for agency founders.
When to Review Your Pay Structure
Your pay structure is not a set-it-and-forget-it decision. Review it at least once a year, ideally before the start of the tax year in April. The key triggers for a review are:
- Your agency's profitability changes significantly.
- You move from basic rate to higher rate tax (or vice versa).
- You hire a co-founder or issue new shares.
- You are planning to sell the agency within the next two years.
- You start taking money from the company for a major personal expense (house deposit, school fees, etc.).
If any of these apply, run the numbers with your accountant before you make a move. A few hours of planning can save you thousands in tax.
The Exit Question: BADR and Your Pay Structure
If you plan to sell your agency, your pay structure affects your eligibility for Business Asset Disposal Relief (BADR). BADR gives you a 14% capital gains tax rate on the first £1 million of gains, instead of the standard 20%.
To qualify, you must hold at least 5% of the shares and be an officer or employee of the company for at least two years before the sale. If you have been taking dividends but no salary, HMRC might argue you are not genuinely an employee. The risk is low if you have a formal service contract and a salary on the books, even at £12,570. But if you take no salary at all, it becomes harder to prove you are an employee.
Keep the salary running. It costs little and protects your BADR position.
Making Tax Digital and Your Pay
From April 2026, Making Tax Digital for Income Tax (MTD for ITSA) becomes mandatory for self-employed individuals and landlords with qualifying income over £50,000. If you are a director taking dividends, your personal tax return will need to be submitted through MTD-compatible software.
This does not change how you pay yourself. But it means your record-keeping needs to be digital and quarterly. If you are not already using software like Xero, QuickBooks, or FreeAgent, now is the time to move. Your accountant can help you set it up.
We cover this in more detail on our Making Tax Digital page.
What about a Sole Trader or Partnership?
If you are a sole trader or partnership agency founder, you cannot use the salary-and-dividends model. You do not have a company. You simply pay income tax and Class 4 NI on your profits through self-assessment.
For sole traders, the equivalent question is: how much do I draw from the business? The answer is simpler. You pay yourself whatever you need, but you are taxed on the full profit regardless of what you actually take. If the business makes £80,000 profit, you pay tax on £80,000, even if you only drew £40,000 for living expenses.
If you are a sole trader and your agency is growing, incorporating into a limited company is worth considering. The tax savings on salary vs dividends are significant once your profits exceed £50,000 or so. But incorporation is not right for everyone. Read our incorporation guide for the full picture.
The Bottom Line
For most limited company agency founders, the optimal structure is a salary of £12,570 per year plus dividends up to the basic rate threshold. That gives you total income of around £50,270, with a tax bill of roughly £3,255. You keep the rest of the profit in the company, reinvesting it into growth or taking it in a lower-income year.
If you need more than £50,270, the dividend tax jumps to 33.75%. That is still better than paying 40% income tax plus NI on a salary, but it is a significant jump. Plan your drawings carefully.
And always, always document your dividends properly. A dividend voucher, a board minute, and distributable reserves. Without those, HMRC can reclassify your dividends as a directors' loan and hit you with a 33.75% tax charge.
If your agency is growing and you want to pay yourself as an agency founder in the most tax-efficient way, speak to an ICAEW qualified accountant who understands agency finances. We work with agency founders every day. We know the numbers, the pitfalls, and the opportunities.
Get in touch if you want to run your specific numbers. We will show you exactly what your pay structure should look like.