When you are employed, your pay arrives in your account every month and the tax is handled automatically. When you go out on your own as a consultant, nobody tells you how to pay yourself, how much to pay yourself, or what the most tax-efficient approach actually looks like.
The answer depends almost entirely on your business structure. Whether you operate as a sole trader or through a limited company changes everything about how you extract income from your consultancy.
At APH, we have been helping consultants across the UK get this right since 2010. This guide explains the options clearly so you can make an informed decision.
Sole trader: how paying yourself works
As a sole trader, you and your business are legally the same entity. There is no formal salary, no payroll, and no dividends.
You simply draw money from your business account into your personal account whenever you need it. These are called drawings, and they are not a business expense. You pay tax on your profits, not on what you draw.
The key thing to understand as a sole trader is that your tax bill is based on what your business earns, not what you take out of it.
If your consultancy makes £60,000 profit in a tax year, you pay income tax and National Insurance on £60,000, regardless of whether you drew £20,000 or the full amount.
This means the most important financial discipline for sole trader consultants is setting aside money for tax as income arrives, rather than spending everything and hoping enough is left in January. A common approach is to set aside 25% to 30% of every payment received into a dedicated savings account.
Sole trader tax on drawings
As a sole trader, you pay income tax on profits above your personal allowance through self-assessment. For the 2025/26 tax year:
- Personal allowance: up to £12,570, no tax payable
- Basic rate: £12,571 to £50,270, taxed at 20%
- Higher rate: £50,271 to £125,140, taxed at 40%
- Additional rate: above £125,140, taxed at 45%
You also pay Class 4 National Insurance contributions:
- 6% on profits between £12,570 and £50,270
- 2% on profits above £50,270
The combined effect of income tax and National Insurance means that a sole trader consultant earning above the higher rate threshold is handing a significant proportion of their profits to HMRC.
This is one of the main reasons many consultants move to a limited company structure as their income grows.
Limited company: how paying yourself works
If you operate through a limited company, your business is a separate legal entity. The money your company earns belongs to the company, not to you personally. To get money out of the company, you need to pay yourself through one of two mechanisms: salary or dividends.
Most limited company consultants use a combination of both, and getting that combination right is where the real tax efficiency lies.
Taking a salary as a limited company consultant
As a director of your limited company, you can put yourself on a salary through the company’s payroll. That salary is a deductible business expense, reducing the company’s taxable profits before corporation tax is calculated.
For most consultants, the most tax-efficient approach is to set a salary at or around the personal allowance threshold of £12,570. This uses your personal allowance efficiently, keeps income tax at zero on the salary, and still generates a National Insurance credit which protects your state pension entitlement.
Taking a salary above this level starts to attract income tax and National Insurance, which reduces the overall tax efficiency of the limited company structure.
Some consultants set their salary slightly lower, at the secondary threshold of £9,100, to avoid employer National Insurance entirely. The right level depends on your specific circumstances and is worth discussing with your accountant each tax year.
Taking dividends as a limited company consultant
Dividends are payments made to shareholders from the company’s after-tax profits. If you are the sole or majority shareholder of your limited company, you can pay yourself dividends from the profits remaining after corporation tax has been paid.
Dividends are taxed at lower rates than income:
- Dividend allowance: up to £500, no tax payable for 2025/26
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Dividends do not attract National Insurance, which is one of the key reasons the salary and dividend combination is so tax-efficient for limited company consultants.
In practice, most consultants set a low salary to use their personal allowance, and then take the remainder of their income as dividends up to the point where higher rate dividend tax starts to apply.
Beyond that point, decisions around further extraction, pension contributions, or leaving profits in the company become more nuanced and depend on your personal tax position for the year.
Salary versus dividends: a practical example
To illustrate the difference, consider a consultant with £80,000 of company profit after expenses.
As a sole trader earning £80,000, income tax and National Insurance would together account for a significant portion of that profit, with the effective combined rate increasing sharply above £50,270.
As a limited company consultant, the company pays corporation tax on its profits, and the director then pays themselves a salary of £12,570 and takes the remaining distributable profit as dividends. The combined effective tax rate across both the company and personally is typically considerably lower.
The exact saving depends on your specific circumstances, but for many consultants at this income level the difference runs to several thousand pounds per year.
Our consultant tax calculator gives you an instant estimate based on your figures. Try it here.
Other ways to extract money from a limited company
Salary and dividends are the most common methods, but there are other legitimate ways to extract value from a limited company that are worth knowing about.
Pension contributions
Employer pension contributions made by your company are a deductible business expense and do not attract National Insurance. For higher earning consultants, they are one of the most tax-efficient ways to extract money from the business while building long term financial security.
Director’s loan
You can loan money to or from your company. Borrowing from your company is possible but comes with strict rules and tax implications if not repaid within nine months of the company’s accounting year-end. This is an area where specialist advice is essential.
Expenses reimbursement
If you incur legitimate business expenses personally, you can reimburse yourself from the company tax-free. This is not technically income extraction but it does put money back in your pocket tax efficiently.
When does a limited company make sense?
Not every consultant should operate through a limited company. For those at lower income levels, the additional administrative costs, accountancy fees, and Companies House obligations may outweigh the tax saving.
As a general guide, a limited company becomes worth reviewing seriously once your consultancy profits are consistently above £30,000 to £35,000 per year. The right answer depends on your specific income level, personal tax position, and long-term plans.
The most important thing is to make this decision actively, based on proper advice, rather than defaulting to whichever structure you started with.
If you are unsure which structure is right for you, book a free consultation call with us.
IR35: the risk that changes everything
If you operate through a limited company, IR35 is something you cannot ignore when thinking about how you pay yourself.
If HMRC determines that your working relationship with a client resembles employment rather than genuine self-employment, you may be required to pay tax and National Insurance as if you were an employee. The tax efficiency of the salary and dividend approach disappears entirely.
Getting your IR35 position right before you decide how to structure your pay is essential for limited company consultants.
Find out more about how we support consultants with IR35 in our IT consultant accountancy services.
Getting the right support
How you pay yourself as a consultant is not a set-and-forget decision. As your income grows, your tax position changes. The optimal salary and dividend split changes year on year. New planning opportunities open up. And the consequences of getting it wrong become more significant.
“I can’t recommend APH highly enough. They’ve been brilliant supporting me across two different businesses, handling everything from regular tax submissions and bookkeeping right through to restructuring shares and selling one of the companies.”
— Mike Waywell
“I have been using APH for 8 years now. They are, and always have been, excellent. Being a small business I do most of the paperwork behind the scenes and they always make sure everything is done correctly and on time.”
— Anna Cook
At APH, we review our consultant clients’ salary and dividend positions every year as a matter of course. It is one of the most straightforward ways we save clients money consistently.
Book a free consultation call today.
Frequently asked questions
How do I pay myself as a sole trader consultant?
As a sole trader you simply transfer money from your business bank account to your personal account when you need it. These are called drawings. You pay income tax and National Insurance on your total profits through self assessment, regardless of how much you actually draw.
What is the most tax efficient way to pay yourself as a limited company consultant?
For most limited company consultants, the most tax efficient approach is a combination of a low salary set at or around the personal allowance threshold of £12,570 and dividends from the company’s after tax profits. The optimal split depends on your total income level and personal tax position and is worth reviewing annually with your accountant.
Can I pay myself differently in different months?
Yes. There is no requirement to pay yourself the same amount each month. Many consultants vary their drawings or dividends based on cash flow and income. However dividend payments must be properly documented with dividend vouchers and board minutes to be treated correctly for tax purposes.
What happens if I pay myself too much as a dividend?
Dividends can only be paid from a company’s distributable profits. If you pay more than the company has available in distributable reserves, the excess becomes an illegal dividend and is treated as a director’s loan, which carries its own tax implications. Your accountant should check the company’s position before significant dividends are paid.
Does the salary and dividend approach still work inside IR35?
No. If you are working inside IR35, deemed employment rules apply and the tax efficiency of the salary and dividend approach is significantly reduced. Your income is treated as if it were employment income for tax purposes.