How Should a Locum Dentist Pay Themselves from a Limited Company in 2025/26?

Why Your Extraction Strategy Matters as a Locum Dentist

If you work as a locum dentist through your own limited company, you are both the director and the main income generator. Every pound you take from the company is either a salary, a dividend, or a director's loan. The way you structure that extraction directly affects how much tax and National Insurance you pay, how much you can contribute to your NHS Pension, and how much stays in the business for future investment.

This article explains the mechanics of paying yourself from a locum limited company in the 2025/26 tax year, including the numbers behind salary versus dividend decisions, the role of IR35, and the practical steps to avoid common pitfalls. It is written for self-employed locum dentists who operate through a personal service company (PSC) and want to optimise their profit extraction without falling foul of HMRC rules.

Salary or Dividend: The Core Trade-Off

Every locum dentist's limited company faces the same question: should I pay myself a salary, take dividends, or both? The answer depends on your total income, your NHS Pension position, and whether your engagements fall inside or outside IR35.

Salary: The Pros and Cons

Paying yourself a salary has two main advantages. First, it counts as "relevant earnings" for pension contribution purposes, which is critical if you want to make personal contributions to an NHS Pension scheme or a private pension. Second, it builds your state pension entitlement through National Insurance credits.

The downsides are equally clear. Salary attracts employer's National Insurance at 15% on earnings above £5,000 per year (2025/26 rate), plus employee's NI at 8% between £12,570 and £50,270, and 2% above that. For a locum dentist drawing a £50,000 salary, the total NI cost (employer plus employee) is roughly £8,000. That is a significant drag on your extraction efficiency.

Most locum dentists take a salary at or just above the personal allowance threshold of £12,570. This avoids income tax on the salary itself and keeps employer NI at zero (since the £5,000 threshold means the first £5,000 of salary is NI-free for the employer, and the remaining £7,570 attracts 15% employer NI, totalling about £1,136). The employee NI on £12,570 is also zero because the employee NI threshold starts at £12,570.

In practice, many locum dentists set their salary at £12,570 exactly. This gives them a clean base for pension contributions without triggering significant NI costs.

Dividends: The Tax-Efficient Alternative

Dividends are paid from post-corporation-tax profits. The company pays corporation tax at 19% or 25% depending on its profit level, and then distributes the remaining profit to you as a shareholder. You then pay dividend tax on any dividends above your dividend allowance of £500 (2025/26).

The dividend tax rates for 2025/26 are:

• Basic rate taxpayers: 8.75%
• Higher rate taxpayers: 33.75%
• Additional rate taxpayers: 39.35%

Because dividends do not attract National Insurance, they are almost always more tax-efficient than salary for extraction above the personal allowance threshold. The trade-off is that dividends do not count as "relevant earnings" for pension purposes, and they do not build state pension entitlement.

A Worked Example: Locum Dentist Drawing £80,000

Let us compare two extraction strategies for a locum dentist whose limited company has £80,000 of distributable profit after all business expenses (excluding salary). We assume the company pays corporation tax at 19% on profits up to £50,000 and 25% on the remainder, with marginal relief.

Strategy A: All salary

Salary: £80,000. Employer NI: 15% on £75,000 (£80,000 minus £5,000 threshold) = £11,250. Employee NI: 8% on £37,700 (£50,270 minus £12,570) = £3,016, plus 2% on £29,730 (£80,000 minus £50,270) = £595. Total NI: £14,861. Income tax: 20% on £37,700 = £7,540, plus 40% on £29,730 = £11,892. Total tax and NI: £34,293. Net take-home: £45,707.

Strategy B: Minimum salary plus dividends

Salary: £12,570. Employer NI: 15% on £7,570 = £1,136. Employee NI: £0. Income tax on salary: £0. Company profit after salary and employer NI: £80,000 minus £12,570 minus £1,136 = £66,294. Corporation tax at 19% on first £50,000 = £9,500, at 25% on remaining £16,294 = £4,074. Total CT: £13,574. Post-tax profit: £52,720. Dividend: £52,720. Dividend allowance: £500 taxed at 0%. Remaining £52,220 taxed at 8.75% (basic rate band: £37,700 minus £12,570 salary = £25,130 available at 8.75%) = £2,199, then £27,090 at 33.75% = £9,143. Total dividend tax: £11,342. Total tax and NI: £1,136 (employer NI) + £13,574 (CT) + £11,342 (dividend tax) = £26,052. Net take-home: £80,000 minus £26,052 = £53,948.

The difference is stark. Strategy B leaves the locum dentist with £8,241 more in their pocket. That is the power of dividend-based profit extraction for a locum dentist operating outside IR35.

IR35: The Wrench in the Works

The above calculation assumes your locum engagements are outside IR35. If HMRC or the engaging practice determines that your contract falls inside IR35, the rules change completely.

Under the off-payroll working rules (Chapter 10 ITEPA 2003, effective from 6 April 2021 for medium and large clients), the engaging practice must decide your IR35 status. If they deem you inside IR35, the practice deducts PAYE and employee NI from the fees they pay your limited company. Your company then receives the net amount, and you cannot pay yourself dividends from that income without risking a double-tax charge.

In practice, an inside-IR35 engagement means your limited company effectively becomes a payroll intermediary. You should draw the entire fee as salary, pay the associated PAYE and NI, and leave little or no profit for dividends. The tax efficiency of the dividend route disappears.

If you have a mix of inside and outside IR35 engagements, you must track them separately. Dividends can only be paid from profits generated by outside-IR35 work. HMRC's guidance on mixed engagements is clear: dividends paid from inside-IR35 income are treated as earnings and subject to PAYE.

NHS Pension Considerations for Locum Dentists

Many locum dentists want to remain in the NHS Pension Scheme. To make member contributions (currently 9.3% to 12.5% depending on earnings), you need "pensionable earnings" from NHS work. If you are a locum working through a limited company, the position is nuanced.

You can only make NHS Pension contributions on earnings that are treated as employment income for tax purposes. Salary from your limited company counts. Dividends do not. If you take a minimal salary and the rest as dividends, your NHS Pension contributions will be based on that small salary, not on the full profit of your company.

Some locum dentists structure their affairs so that they take a higher salary from the limited company specifically to maximise NHS Pension contributions. This is a deliberate trade-off: you pay more NI now in exchange for a larger NHS pension later. The decision depends on your age, career stage, and how long you expect to remain in the NHS scheme.

If you are a locum dentist who does mainly private work, the NHS Pension question is less relevant. You can focus purely on tax efficiency.

Director's Loan Accounts: A Warning

A director's loan account (DLA) records money you borrow from your company or money the company owes you. It is not a method of extraction; it is a record of debt.

If you take money from the company without declaring it as salary or dividend, you create a DLA debit balance. If that balance is not repaid within nine months of the company's year-end, the company faces a tax charge under s.455 CTA 2010 at 33.75% (2025/26 rate). This is a temporary charge, refundable when the loan is repaid, but it creates a cashflow problem and an administrative burden.

HMRC scrutinises DLA balances closely, especially in dental locum companies where the director is also the sole shareholder. If you need to extract money, do it properly through payroll or dividend vouchers. Do not rely on the DLA as a backdoor extraction method.

Practical Steps for Your 2025/26 Extraction Plan

Here is a step-by-step approach for a locum dentist using a limited company:

• Step 1: Determine your IR35 status for each engagement. Separate inside-IR35 income from outside-IR35 income in your accounting records.
• Step 2: Set your salary at £12,570 (or slightly higher if you need NHS Pension relevant earnings). Process this through payroll monthly or quarterly.
• Step 3: Pay corporation tax on your profits. Use the practice profit extraction calculator to model your numbers.
• Step 4: Declare and pay dividends from post-tax profits, staying within your available retained earnings. Issue dividend vouchers and keep board minutes.
• Step 5: Review your total income. If your combined salary and dividends exceed £100,000, you lose personal allowance at £1 for every £2 over. This creates a 60% marginal tax trap on extraction between £100,000 and £125,140.
• Step 6: Consider pension contributions from the company. Employer pension contributions are an allowable expense (no NI, no benefit in kind), and they reduce corporation tax. This can be more efficient than extracting profit as salary or dividend and then contributing personally.

Common Mistakes Locum Dentists Make

Three errors recur frequently in locum limited company tax returns:

First, paying dividends when the company has insufficient retained profits. Dividends must come from distributable reserves. If you pay dividends in a loss-making year, they are unlawful under the Companies Act 2006 s.830, and HMRC can reclassify them as salary, triggering PAYE and NI.

Second, ignoring the dividend allowance. The £500 allowance (2025/26) means the first £500 of dividends is tax-free. Many locum dentists forget to apply it, overpaying tax by 8.75% on that slice.

Third, failing to register for Self Assessment. Even if your company pays all tax through PAYE and corporation tax, you as an individual must file a Self Assessment return if your dividend income exceeds £10,000 or your total tax liability is not fully covered by PAYE.

When to Take Professional Advice

This article sets out the general principles, but your specific situation will differ. A locum dentist doing three days a week in NHS practices with a mix of inside and outside IR35 contracts faces different decisions from a locum doing exclusively private work through a single agency.

If you are unsure about your IR35 status, your NHS Pension position, or the optimal extraction mix, speak to a dental-specialist accountant. The locum dentist tax services page on this site explains how we help locum dentists structure their limited company affairs. You can also use the locum cost-benefit calculator to compare different extraction scenarios before making a decision.

The key takeaway is this: for a locum dentist operating outside IR35, a salary of £12,570 plus dividends from post-tax profits is almost always the most tax-efficient extraction strategy in 2025/26. But the numbers shift if IR35 applies, if NHS Pension contributions matter, or if your total income pushes you into the personal allowance taper. Model your own figures, or let a specialist accountant do it for you.