Tax Planning for Company Directors
How UK company directors can structure their pay through salary, dividends and pension contributions to minimise their overall tax bill legally.
As a UK company director, you have far more control over how you receive your income than an employee does. The way you split your pay between salary, dividends and pension contributions can save you thousands of pounds each year in tax and National Insurance.
This guide covers the main strategies and the numbers behind them.
The three main routes for extracting profit
| Method | Corporation Tax relief? | Income Tax | National Insurance |
|---|---|---|---|
| Salary | Yes (deductible expense) | 20-45% above personal allowance | Employee 8% + Employer 13.8% |
| Dividends | No (paid from post-tax profits) | 8.75-39.35% above £500 allowance | None |
| Pension contributions | Yes (employer contribution) | None | None |
Each route has different tax consequences, and the most efficient approach almost always uses a combination of all three.
Setting the right salary level
The first decision is how much salary to take. Most directors choose one of two common levels:
Option 1: Salary at the personal allowance (£12,570)
This uses your full personal allowance, meaning no Income Tax is due. You will pay a small amount of employee National Insurance above the primary threshold (£12,570 in 2024/25), and the company pays employer NIC at 13.8% above the secondary threshold.
Option 2: Salary at the NI secondary threshold
Some directors set their salary at a level that avoids employer National Insurance entirely. The secondary threshold is currently £9,100 per year. This saves the company 13.8% employer NIC on the difference but means you are not fully using your personal allowance through salary alone.
| Salary level | Income Tax | Employee NIC | Employer NIC | Corporation Tax saving (25%) |
|---|---|---|---|---|
| £9,100 | £0 | £0 | £0 | £2,275 |
| £12,570 | £0 | £0 | £479 | £3,143 |
At the personal allowance level, the employer NIC cost is relatively small and the Corporation Tax deduction is larger. For most directors, the £12,570 salary is the better option, but it depends on whether the company needs to preserve cash.
Setting the right director’s salary requires reviewing the thresholds each April since they change with the Budget.
Taking dividends above the salary
After salary, dividends are the next most tax-efficient way to extract profit. Dividends are paid from post-tax profits, so the company has already paid Corporation Tax on the money. But dividends carry no National Insurance, which makes them cheaper than additional salary.
Dividend tax rates (2024/25)
| Band | Rate | Income range (including salary) |
|---|---|---|
| Dividend allowance | 0% | First £500 of dividends |
| Basic rate | 8.75% | Total income up to £50,270 |
| Higher rate | 33.75% | £50,271 to £125,140 |
| Additional rate | 39.35% | Above £125,140 |
The combined effective rate (Corporation Tax plus dividend tax) is still lower than the equivalent salary route at every level. For basic rate dividends, the combined burden is roughly 31%, compared with around 42% for the same amount taken as salary (including employer NIC).
Keep in mind that you can only pay dividends when the company has sufficient distributable reserves. Paying dividends when there are no profits is unlawful and HMRC will treat them as salary, triggering NIC and penalties. Read more about dividend tax and how the rates work.
Pension contributions: the most tax-efficient route
Employer pension contributions offer the best tax treatment of all three methods. The contribution is deductible from the company’s profits (saving Corporation Tax) and there is no Income Tax or National Insurance for you personally.
The annual allowance for pension contributions is £60,000 per year (2024/25), but you can carry forward unused allowance from the previous three years. That means if you have not contributed much in recent years, you could make a lump sum contribution of up to £180,000 in a single year.
| Extraction method | £10,000 company profit | Tax and NIC | You receive |
|---|---|---|---|
| Salary | CT saving: £2,500 | Income Tax + NIC: ~£3,200 | ~£6,800 |
| Dividends | CT paid: £2,500 | Dividend tax: ~£656 | ~£6,844 |
| Pension | CT saving: £2,500 | None | £10,000 (in pension pot) |
The obvious trade-off is that pension money is locked away until you reach the minimum pension age (currently 55, rising to 57 from 2028). But for building long-term wealth, no other method comes close. See our guide on pension contributions for more detail on the allowances and rules.
The £100,000 income trap
If your total income (salary plus dividends plus other income) goes above £100,000, your personal allowance is gradually withdrawn. For every £2 of income above £100,000, you lose £1 of personal allowance. This creates an effective 60% marginal tax rate between £100,000 and £125,140.
The most common way to avoid this trap is to make pension contributions that bring your adjusted net income below £100,000. A contribution of £25,140 would restore your full personal allowance, saving you £5,028 in Income Tax on top of the Corporation Tax relief the company receives.
Combining the strategies: a worked example
Here is how a director with £80,000 of company profit might structure their pay:
| Component | Amount | Tax cost |
|---|---|---|
| Salary | £12,570 | £0 Income Tax, minimal NIC |
| Employer pension contribution | £20,000 | £0 personal tax |
| Dividends | £35,000 | ~£3,019 dividend tax |
| Retained in company | £12,430 | Corporation Tax only |
Total personal tax: approximately £3,019. Compare this with taking the full £80,000 as salary, which would cost over £25,000 in combined Income Tax and NIC.
Timing considerations
Dividends are flexible
You do not need to declare dividends on a fixed schedule. You can vote them monthly, quarterly or as a single year-end payment. Some directors vote interim dividends throughout the year and then adjust the final amount to stay within a particular tax band.
Pension contributions can be lumpy
You do not need to contribute to your pension every month. Making a single large contribution before your company’s year end reduces Corporation Tax for that period and may be more manageable than monthly payments.
Year-end planning window
The three months before your accounting year end are the most important planning period. Review your total income for the year, decide how much to take as dividends, and make any pension contributions before the period closes. This is when the real savings are locked in.
Family members as shareholders
If your spouse or civil partner is a basic rate taxpayer (or has unused personal allowance), making them a shareholder allows you to split dividend income across two tax bands. This is legitimate provided they genuinely own the shares and the arrangement has commercial substance.
For a couple where one partner earns £50,000 and the other earns nothing, splitting dividends equally could save over £5,000 per year by using two personal allowances and two basic rate bands.
Record keeping
Whichever combination you choose, keep clear records:
- Board minutes for every dividend declaration
- Dividend vouchers showing the amount, date and shareholder
- Payroll records for salary through RTI
- Pension contribution receipts from your provider
HMRC can enquire into any of these payments, and having proper documentation is your best protection.
If you withdraw money from the company outside of salary and dividends, it goes through your director’s loan account . An overdrawn DLA left unpaid beyond nine months after the year end triggers a 33.75% Section 455 tax charge, so factor this into your extraction planning.