Limited company director tax planning: a practical guide

Why tax planning matters for company directors

A limited company is a separate legal entity from its director. This means the company has its own tax position, while money you receive personally can be subject to Income Tax, dividend tax or National Insurance depending on how it is taken.

Planning ahead can help you understand how much money is available to extract from the company, when tax payments will arise and whether there are opportunities to use legitimate tax allowances and reliefs.

The most appropriate approach depends on your circumstances. A strategy that works for one director may not be suitable for another, particularly where there is other employment income, investment income, pension income or more than one company.

Salary and dividends: how do they differ?

A director can generally receive money from their company in different ways, including salary and dividends. These are taxed differently and have different implications for the company.

Salary is normally an allowable business expense when calculating the company’s taxable profits, provided it is incurred wholly and exclusively for the purposes of the trade. It is also subject to the relevant PAYE and National Insurance rules.

Dividends are distributions of company profits rather than business expenses. They can only normally be paid when the company has sufficient distributable profits and the appropriate company records and procedures have been followed.

Because salary and dividends are treated differently for tax purposes, comparing the overall effect rather than looking at one tax rate in isolation is important.

How Corporation Tax affects the calculation

A limited company generally pays Corporation Tax on its taxable profits. The current Corporation Tax rates are 19% for companies with profits of £50,000 or less and 25% for companies with profits above £250,000, with Marginal Relief potentially applying between those thresholds.

The amount available for dividends is therefore affected by the company’s profits after taking account of allowable costs and Corporation Tax. You cannot simply treat the company’s turnover as money available for personal extraction.

The £50,000 and £250,000 thresholds can also be affected by associated companies and short accounting periods, so companies with more complex structures may need more detailed calculations.

Planning your director’s salary

The salary you take from your company should be considered alongside your wider tax position. Factors can include your Personal Allowance, National Insurance position, other employment income and the company’s Corporation Tax position.

The standard Personal Allowance is currently £12,570 for the 2026/27 tax year, although it is reduced where adjusted net income exceeds £100,000 and can be reduced to nil at higher income levels.

For many owner-managed companies, the director’s salary is deliberately kept at a level that makes sense for their particular circumstances, with dividends considered separately. There is no single salary figure that is automatically correct for every director.

If you are a director with other employment income, the calculation can be significantly different because your Personal Allowance and tax bands may already be partly or fully used elsewhere.

Understanding dividend tax

Dividends are taxed differently from salary. The first £500 of dividend income is covered by the Dividend Allowance for the 2026/27 tax year, although dividends still count towards the relevant tax bands.

For 2026/27, dividend income above the allowance is taxed at 10.75% within the basic-rate band, 35.75% within the higher-rate band and 39.35% at the additional rate.

The amount of dividend tax you pay therefore depends partly on your other income. A director who already has significant employment or other taxable income may pay dividend tax at a higher rate than a director with little or no other income.

When planning dividends, it is important to consider both the company’s available distributable profits and the director’s personal tax position.

Think about the whole tax year

Tax planning works best when considered across the full tax year rather than immediately before the company year end.

Before deciding how much to extract, consider expected company profits, Corporation Tax, salary already paid, dividends already received and any other income you expect to have during the tax year.

This can help avoid unexpected personal tax liabilities and can make it easier to budget for dividend tax and other payments that may arise.

Pension contributions can be part of the plan

Employer pension contributions can be another consideration for a company director. Subject to the relevant rules and limits, a company may be able to make contributions to a director’s pension as an employer expense.

Pension contributions are different from taking money personally as salary or dividends. The tax treatment depends on the circumstances and there are limits and conditions that need to be considered.

If retirement planning is one of your objectives, it can therefore be useful to consider pension contributions alongside salary and dividends rather than treating company extraction as a simple two-way choice.

Consider genuine business expenses

Making sure the company records genuine allowable business expenses correctly can reduce taxable company profits and ensure that the business is not paying more tax than necessary.

Depending on the circumstances, expenses can include areas such as business travel, professional subscriptions, accountancy fees, insurance, equipment and other costs incurred for the purposes of the business.

Expenses must meet the relevant tax rules. A personal expense does not become a business expense simply because it is paid from the company bank account, so it is important to keep clear records and understand the rules that apply.

Do not overlook the company’s cash position

Tax planning should not focus solely on reducing tax. A company also needs enough cash to pay Corporation Tax, VAT, PAYE, suppliers and other liabilities when they fall due.

Taking too much money from the company can create cash-flow problems even if the extraction appears tax-efficient on paper.

A sensible approach is to forecast the company’s cash position and upcoming liabilities before deciding how much money can safely be taken personally.

What if your circumstances change?

Your tax planning may need to change if your company becomes more profitable, you start another job, your personal income changes, you become a higher-rate taxpayer, you employ staff or you acquire an interest in another company.

Changes in the company structure can also affect the Corporation Tax position. For example, associated companies can affect the Corporation Tax thresholds used when determining the applicable rate.

Reviewing the position during the year can therefore be more useful than relying on a strategy that was appropriate several years ago.

A practical tax planning checklist

Before the end of the tax year, consider the company’s expected taxable profit, Corporation Tax liability, salary paid, dividends already received and your other personal income.

Also consider whether there are legitimate business expenses that need to be recorded, whether pension contributions are appropriate and whether the company has enough cash reserved for its tax and other liabilities.

If your circumstances are straightforward, this review may be relatively simple. If your income is higher, you have several income sources or your company structure is more complicated, professional advice can help you understand the available options.

Get advice before making major decisions

Tax planning can involve decisions about salary, dividends, pension contributions, company expenses and the timing of transactions. The tax result can vary significantly depending on your individual circumstances.

Before making a significant extraction or restructuring decision, consider obtaining advice based on your actual company figures and personal tax position rather than relying on a general rule or online calculation.

Good tax planning should help you understand the choices available, the tax consequences and the cash-flow implications before you make a decision.