Best ways for creative agency founders to pay themselves legally

Key takeaways

• Use a mix of salary and dividends. A small director salary uses your personal allowance tax-free, while dividends are taxed at lower rates than a high salary, making this the most tax-efficient structure for most creative agency founders.
• Your pay must come from sustainable profit. Pay yourself from the agency's post-tax profits, not from client cash in the bank. This protects the business and ensures you're rewarding genuine success.
• Benchmark against the market. Compare your total pay package (salary plus dividends) to what a managing director or creative director would earn at a similar-sized agency to ensure it's fair and justifiable.
• Plan for tax payments in advance. Dividends don't have tax deducted at source. You must set aside money for your personal tax bill, typically paid in January and July each year.
• Get the legal paperwork right. Document salary payments through payroll (PAYE) and dividend payments with board minutes and dividend vouchers. This keeps you compliant with HMRC rules.

What is the best pay structure for a creative agency founder?

The best creative agency leadership pay structure for most founders is a combination of a small director salary and the rest taken as dividends. This approach is typically the most tax-efficient way to get money from your company into your personal bank account.

You take a salary up to the personal allowance, which is £12,570 for the current tax year. This uses your tax-free allowance and keeps you within the National Insurance system for state pension purposes. The rest of your income comes as dividends from the company's post-tax profits.

Dividends are taxed at lower rates than salary. For the current tax year, the dividend allowance is £500. After that, basic-rate taxpayers pay 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%. This is usually cheaper than paying income tax and National Insurance on a large salary.

This structure works because creative agencies are typically limited companies. The company is a separate legal entity from you. You are both a director (an employee) and a shareholder (an owner). The salary pays you as a director. The dividends pay you as a shareholder.

It's not just about saving tax. A good creative agency leadership pay structure also supports your business's health. It ensures you pay yourself from real profits, not from client payments that should cover team costs or software subscriptions.

How do you set the right director salary level?

Set your director salary at a level that uses your tax-free personal allowance but avoids higher National Insurance costs. For the current tax year, a monthly salary of around £1,048 (£12,570 annually) is common. This is below the secondary threshold for employer National Insurance, keeping costs low for your agency.

You must run this salary through a proper payroll, known as PAYE (Pay As You Earn). Even if you are the only employee, your company must register as an employer with HMRC. You need to run payroll each month, deduct income tax and employee National Insurance, and pay these to HMRC.

Using payroll software like Xero or FreeAgent automates this. It calculates the deductions, files the necessary returns (RTI), and tells you how much to pay HMRC each month. This keeps you compliant and avoids penalties.

Some founders take a slightly lower salary, perhaps £9,100 a year, to stay below the Lower Earnings Limit for National Insurance. This still counts for state pension purposes but means you don't actually pay National Insurance. The right choice depends on your personal circumstances and long-term plans.

Your director salaries are a business expense. This reduces your agency's corporation tax bill. For a profitable agency, every £1,000 in salary saves £250 in corporation tax (at the 25% main rate). This is one reason a salary is useful, even if it's small.

When should you pay dividends from your creative agency?

You should pay dividends only when your creative agency has sufficient post-tax profits to cover them. This is a legal requirement. You cannot pay dividends if the company is making a loss or has no retained profits, as this is effectively taking money from the company that belongs to creditors.

First, calculate your agency's distributable profits. Start with your net profit before tax. Subtract your corporation tax bill for the year. The money left is what you can legally pay as dividends. It's the profit that belongs to the shareholders after all taxes are paid.

Timing is important. Many creative agency founders pay dividends quarterly or twice a year. This matches the natural cash flow cycle of the business. You wait until major client invoices are paid, you've covered all agency costs for the period, and you can see a clear profit.

Always hold a board meeting (even if it's just you) and produce formal dividend minutes. These minutes should state the amount of the dividend per share and the date it will be paid. You must also provide a dividend voucher to each shareholder, which includes your name, the company name, the date, and the amount.

This paperwork is not just a formality. It proves to HMRC that the payment is a dividend, not a salary or a loan. If you can't prove it, HMRC may reclassify it as salary and charge backdated income tax and National Insurance. Specialist accountants for creative agencies can help you set up this process correctly from the start.

What are the tax implications of salary vs dividend?

The main tax difference between salary and dividend is the rate you pay. Salary is subject to income tax (20%, 40%, or 45%) and National Insurance (employee and employer). Dividends have a tax-free allowance and are then taxed at lower rates (8.75%, 33.75%, or 39.35%), with no National Insurance due.

Let's use a simple example. Imagine your creative agency has made £80,000 in pre-tax profit. You want to take £50,000 as personal income.

Option A: Take it all as salary. The company pays corporation tax on the remaining £30,000. You pay income tax and National Insurance on the full £50,000. The total tax taken (company and personal) is often higher.

Option B: Take a £12,570 salary and £37,430 as dividends. The salary uses your tax-free allowance. The company pays corporation tax on the profit first. You then pay dividend tax on the amount you take. The total tax bill is usually lower with this mix.

You must remember that dividends are paid from profits after corporation tax. The company has already paid tax at up to 25% on that money. This is why the personal dividend tax rates are lower, to account for this double layer of tax.

The most efficient split changes each year with tax allowances and rates. It also depends on your other income. If you have a second job or rental income, your personal allowance may be reduced, changing the calculation. A good creative agency leadership pay structure is reviewed annually.

How do you benchmark your pay against the market?

Benchmark your total pay package (salary plus dividends) against what a managing director or creative director would earn at a similar agency. This justifies your pay to potential investors, lenders, and HMRC, and ensures you are not under or over-paying yourself.

Start by defining your role. Are you the full-time managing director, the executive creative director, or both? Look at salary surveys for the marketing and creative industries. Sources like The Drum's salary survey or Creative Recruitment's annual guide provide reliable data.

For a small creative agency (turnover under £500k), founder total compensation might range from £40,000 to £70,000. For a medium agency (£500k-£2m turnover), it could be £70,000 to £120,000. For a larger, established agency, it can be significantly higher.

This market benchmarking is not about copying a number. It's about understanding the value of your work. If you pay yourself £200,000 but your agency only makes £50,000 profit, that's unsustainable. If you pay yourself £30,000 but the agency is highly profitable, you might be stifling your personal finances and creating a tax inefficiency.

Your pay should reflect your agency's financial performance. A common rule of thumb is that owner remuneration should be between 10% and 20% of agency revenue, depending on profitability and stage of growth. This market benchmarking helps you set a fair and defensible level.

What are the common mistakes creative agency founders make?

The most common mistake is taking money out as needed without a plan, treating the business bank account like a personal one. This leads to cash flow crises, unpaid tax bills, and difficulty understanding true profitability.

Another error is paying a dividend without having the legal profits to cover it. This is called an illegal dividend. If your company later fails, you could be forced to repay that money. You must always check retained profits on your balance sheet before declaring a dividend.

Founders often forget to set aside money for their personal tax bill on dividends. Unlike salary, tax isn't deducted at source. You need to save roughly 25-30% of any dividend you take for your January tax payment. Not doing this leads to a nasty shock.

Some founders pay themselves a huge salary to avoid the paperwork of dividends. This is tax-inefficient and increases the agency's employer National Insurance bill unnecessarily. It also reduces the company's profit, which can affect its valuation if you ever want to sell.

Finally, many neglect to document everything properly. No payroll records for the salary, no dividend minutes or vouchers. When HMRC enquires, they cannot prove the nature of the payments. This can result in penalties and back taxes. Setting up the right systems from the start is crucial for a robust creative agency leadership pay structure.

How should your pay structure change as the agency grows?

As your creative agency grows, your pay structure should become more formal and aligned with senior executive pay in your industry. Move from irregular dividend payments to a regular, planned schedule that supports your personal budgeting and the company's cash flow forecasting.

When you hire senior team members or a managing director, you need to benchmark your pay against theirs. You can't justify paying yourself £150,000 while paying your hired MD £70,000 for doing the same job. Your pay should reflect your role and contribution.

With higher profits, tax planning becomes more important. You might consider pension contributions as part of your compensation. Pension payments from the company are a tax-efficient business expense and don't count towards your personal income tax. This can be more efficient than taking all money as dividends.

If you bring on other shareholders, like a co-founder or investor, your dividend decisions must consider them. Dividends are paid per share. If you own 60% and your co-founder owns 40%, a £10,000 dividend pot gives you £6,000 and them £4,000. Your pay structure is now tied to theirs.

Growth often means seeking funding or preparing for sale. Both investors and buyers will scrutinise your historical pay. They want to see that the agency can afford its leadership team and that profits are real. A messy, undocumented pay history can reduce your agency's value or scare off investors.

What systems do you need to manage pay correctly?

You need three core systems: a reliable payroll system, accurate accounting software, and a process for documenting dividend decisions. These systems work together to ensure your creative agency leadership pay structure is executed flawlessly and compliantly.

For payroll, use dedicated software. Xero, FreeAgent, and QuickBooks all have built-in payroll modules that handle calculations, submissions to HMRC (RTI), and payslips. They automatically update your accounts, so the salary expense is recorded correctly. This is non-negotiable, even for a one-person payroll.

Your accounting software (like Xero) is your source of truth for profits. Before declaring a dividend, you must look at the retained earnings figure on your balance sheet within the software. This shows the cumulative profit the company has made since it started, minus any dividends already paid. Never declare a dividend based on your bank balance.

For dividends, create a simple template for board minutes and a dividend voucher. Every time you pay a dividend, fill in the template, sign it, and file it with your company records. Many accounting software packages can generate these documents for you.

Finally, use a separate personal savings account for your tax money. Every time you receive a dividend, transfer a percentage (e.g., 25-30%) into this account. This ensures the money for your January tax bill is safe and not spent. This simple system prevents one of the biggest financial stresses for founders.

Getting this right from the beginning saves huge headaches later. If it feels overwhelming, try our free Agency Profit Score to get clarity on your financial health and see exactly how much profit you have available to pay yourself.

Designing the right creative agency leadership pay structure is a key commercial decision. It balances your personal financial needs with the health and growth potential of your business. By combining a sensible director salary with well-timed dividends, supported by proper systems and market benchmarking, you create a sustainable way to reward yourself for building a successful agency.

If you're unsure about your current setup or want to plan for the next stage of growth, speaking to a specialist can provide clarity. Specialist accountants for creative agencies understand these unique challenges and can help you optimise your approach for both compliance and performance.