A director is an employee and therefore entitled to a salary, a shareholder is an investor and therefore entitled to a dividend. Within a substantial amount of limited companies (SME’s) the director often holds shares so is entitled to withdraw both forms of personal income.
Dividends are paid from company profits after corporation tax and are taxed as personal income via Dividend Tax. Dividends work differently than a PAYE salary because they are not liable for any National Insurance and have a lower taxable rate than salaries.
It is most often found that a monthly salary (within the Lower Earnings Limit) together with regular dividends is the most tax efficient way of withdrawing personal funds from a company. It would be advisable to discuss the amounts that you can withdraw with an accountant to ensure that you do not take more than the company can afford.