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 in England, Wales and Northern Ireland | Employee 8% + Employer 15% at the standard rates |
| Dividends | No (paid from post-tax profits) | 10.75-39.35% 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 the standard personal allowance, meaning no Income Tax is due if the director has no other taxable income. The 2026–27 employee primary threshold is £12,570, while the company pays employer NIC at 15% above the £5,000 secondary threshold before any Employment Allowance.
Option 2: Salary at the NI secondary threshold
Some directors set their salary at a level that avoids employer National Insurance. The 2026–27 secondary threshold is £5,000 per year, but that amount is below the £6,708 Lower Earnings Limit needed to record a qualifying year from the salary alone.
| Salary level | Income Tax | Employee NIC | Employer NIC | Corporation Tax effect |
|---|---|---|---|---|
| £5,000 | £0 | £0 | £0 | Depends on the company’s marginal rate |
| £6,708 | £0 | £0 | £256 before Employment Allowance | Depends on the company’s marginal rate |
| £12,570 | £0 | £0 | £1,136 before Employment Allowance | Depends on the company’s marginal rate |
The right level depends on other income, State Pension record, Employment Allowance eligibility and the company’s marginal Corporation Tax rate. It should be reviewed rather than treated as a universal annual formula.
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 for 2026–27
| Band | Rate | Income range (including salary) |
|---|---|---|
| Dividend allowance | 0% | First £500 of dividends |
| Basic rate | 10.75% | Total income up to £50,270 for a person with the standard allowance |
| Higher rate | 35.75% | £50,271 to £125,140 |
| Additional rate | 39.35% | Above £125,140 |
The combined result depends on the company’s Corporation Tax rate, the director’s tax band and whether employer NIC relief is available. Dividends carry no NIC, but they are paid from profits after Corporation Tax and are not automatically the cheapest route in every case.
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 standard annual allowance for pension input is £60,000 in 2026–27, but it can be lower because of tapering or the money purchase annual allowance. Unused allowance from the previous three tax years may be available if the carry-forward conditions are met.
| 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 |
This illustration is not a complete tax calculation: the actual result depends on the company’s Corporation Tax rate, available distributable profit, the director’s other income and current dividend bands.
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 can trigger a Section 455 tax charge. For loans made on or after 6 April 2026, the rate is 35.75%; different rates can apply to earlier loans.