Do I Need Payroll if I Only Pay Myself as a Director

Setting up a limited company gives you flexibility in how you take money out of the business. You can pay yourself a salary through PAYE, take dividends as a shareholder or withdraw money you previously put into the company through a director’s loan account. Because of these different options many new directors wonder whether they must run payroll if they are the only person being paid.

The answer depends on how you plan to take money from your company. If you want to pay yourself a salary you must operate payroll. If you take no salary and rely solely on dividends you do not need payroll. The right approach depends on your income level, your tax position and how you want to structure your first year. This article explains the rules clearly so you can make an informed decision and stay fully compliant with HMRC.

Understanding How Directors Can Pay Themselves

Company directors have four main ways to take money from a limited company:

• salary through PAYE

• dividends from profits as a shareholder

• reimbursement of personal expenses

• withdrawals from the director’s loan account if in credit

Only the first two are forms of personal income. The others are accounting adjustments.

Payroll is needed only if you choose to pay a salary. You do not need payroll to take dividends or repay money owed to you.

When You Must Operate Payroll as a Director

You must register for PAYE and run payroll if:

• you pay yourself any salary

• you pay a director or employee above the Lower Earnings Limit

• you provide taxable benefits in kind

• you pay anyone else a wage including family members

The Lower Earnings Limit (LEL) for the 2024 to 2025 tax year is £123 per week or £533 per month. Even if your earnings are below the point where you pay tax or National Insurance, crossing the LEL requires payroll and Real Time Information (RTI) submissions.

Many directors choose to pay themselves a small salary at or just above the LEL to protect their state pension record. Once they do this payroll becomes mandatory.

When Payroll Is Not Required

You do not need payroll if:

• you take no salary at all

• you pay yourself only dividends

• the company owes you money and you withdraw it from your director’s loan account

• you reimburse yourself for business expenses paid personally

In these situations there is no PAYE income and no need to register as an employer.

Many new directors choose dividend-only payments especially if the company is still building profits or cashflow. This avoids payroll but comes with other considerations explained later.

Why So Many Directors Choose a Small Salary

Even though payroll creates administrative work, a small salary can be beneficial. Directors often choose to pay themselves:

• £6,396 per year (Lower Earnings Limit)
  or

• £9,100 per year (below employer NI threshold but above LEL)

These small salaries:

• create a qualifying year for the state pension

• reduce Corporation Tax because salary is an allowable expense

• leave most income to be taken as dividends which have lower tax rates

If you use this strategy payroll is required because even a small salary must be processed through PAYE.

How Director Payroll Works

Running payroll for a director is not complicated but it must be done correctly.

Key requirements

• register as an employer with HMRC

• set up payroll software

• run monthly or annual payroll

• submit an RTI return every time you pay yourself

• provide a payslip

• keep payroll records for at least three years

Directors follow the cumulative method of National Insurance rather than the standard weekly or monthly basis. Payroll software handles this automatically.

Dividends Without Payroll: What You Need to Know

If your company has profit after tax you can pay yourself dividends without using payroll. However dividends must follow strict rules.

You must have sufficient retained profit

You cannot take dividends if the company has no profit. Doing so creates an overdrawn director’s loan account which can trigger tax issues.

You must hold a board meeting

Even if you are the only director you must:

• declare the dividend

• record the decision

• create a dividend voucher

Dividends do not count as a business expense

They do not reduce Corporation Tax.

Dividends do not create a state pension year

If you take no salary you may miss out on National Insurance credits.

Dividend tax applies

You pay dividend tax if your dividends exceed your annual allowance and personal allowance.

This approach removes the need for payroll but reduces flexibility and benefits.

Comparing Salary vs Dividends for Payroll Purposes

| Question | Salary | Dividends |
| Saving on Corporation Tax | Yes | No |
| Requires payroll | Yes | No |
| Affects state pension | Yes | No |
| Needs profit | No | Yes |
| Attracts National Insurance | Possibly | No |
| Requires board minutes | No | Yes |
| Tax rate | PAYE tax | Dividend tax |

This comparison shows why many directors choose a low salary plus dividends.

When a Director’s Loan Account Matters

If the company owes you money because you paid for start-up costs personally, you can withdraw that money without payroll or dividends.

Examples:

• reimbursing yourself for expenses

• repaying money you lent the business

• withdrawing from a credit balance in your loan account

No payroll is needed but careful bookkeeping is essential. If the loan account moves into debit (meaning you owe the company money) tax charges may apply.

Edge Cases Where Payroll Might Still Be Required

Even if you take no salary, payroll may still be required if:

• the company provides you with taxable benefits such as a company car

• you take mileage payments above HMRC’s approved rates

• you receive bonuses or allowances of any kind

• you employ a spouse or another worker

In these situations PAYE rules kick in automatically.

Why You Might Choose Not to Run Payroll

Some directors decide not to run payroll in the first year because:

• the business is not yet profitable

• they want to keep things simple

• they prefer flexible dividend payments later

• their income will remain below the personal allowance

• they are not concerned about building NI credits

This approach is common for part time companies or side projects but should be reviewed annually as the business grows.

Why You Might Choose to Run Payroll Even if You Do Not Have To

There are advantages to running payroll even when not strictly necessary:

• building NI credits for the full state pension

• improving mortgage affordability

• demonstrating consistent income to lenders

• ensuring the company receives Corporation Tax relief

• maintaining clear separation between personal and company finances

For directors aiming to grow the business, payroll is often a good long term decision.

Examples of Practical Scenarios

Example 1: Director takes dividends only

Sarah’s business makes £25,000 profit. She takes dividends only and does not operate payroll. She is below the tax thresholds and has no PAYE income. Payroll is not required.

Example 2: Director takes a small salary

James pays himself £9,100 per year. His company gets Corporation Tax relief and he builds a state pension year. He must run payroll.

Example 3: Early stage company with no profit

Anita’s business is not yet profitable. She reimburses expenses and takes nothing else. She does not need payroll.

Example 4: Director takes dividends then wants a mortgage

Tom takes only dividends but his lender prefers PAYE income. He introduces a small salary the following tax year and starts payroll.

Example 5: Director provides services through another company

If you are paid as a director of your own company but not as an employee you still need payroll if you receive salary. Dividends alone do not trigger PAYE.

HMRC Compliance Requirements

If payroll is required you must register before the first payment. HMRC expects:

• on time RTI submissions

• accurate NIC calculations

• correct treatment of director’s NI

• proper record keeping

• correct end of year filings

Failure to run payroll correctly can lead to penalties. Software automates much of this and reduces risk.

Should You Register for Payroll Voluntarily

Some directors register for PAYE even when they are not ready to pay themselves. This is optional but helpful if you plan to:

• begin payroll soon

• hire staff later

• provide benefits in kind

• build a consistent financial record

It is not compulsory to register until the first payroll payment, but early setup avoids last minute admin.

Pros and Cons of Running Payroll for Directors Only

Pros

• builds National Insurance credits

• reduces Corporation Tax

• supports mortgage and loan applications

• creates predictable income

• increases financial discipline

Cons

• creates admin

• must meet payroll deadlines

• may require accounting fees

• increases obligations under HMRC rules

The benefits usually outweigh the disadvantages once a company is consistently trading.

Conclusion

You only need payroll as a director if you plan to pay yourself a salary or provide taxable benefits. If you take dividends only and receive no PAYE income you do not need to run payroll. Most directors use a combination of a small salary and dividends because it gives tax efficiency, NI credits and more flexibility. Running payroll adds administrative responsibility but it also supports long term financial planning.

Before deciding whether to use payroll consider your expected income, your need for NI credits, whether the company is profitable and how your choice affects future tax planning. With good advice and clear bookkeeping you can choose the right approach and stay fully compliant with HMRC rules.