Whilst the government has significantly reduced tax allowances for limited companies in recent years, careful planning means directors can still be more tax-efficient than sole traders or employees. It’s important to take advice from your Workwell accountant, as good tax planning can save you £££s. In this article, we explain how to operate your business in a tax-efficient manner, and how to pay yourself whilst limiting your tax liability.
Salary & Dividends
For most company directors, the best approach will be to pay yourself a mixture of salary and dividends. Paying yourself a salary counts as an allowable business expense, reducing your company’s Corporation Tax liability. Salary Thresholds for 2025/26 Personal Allowance up to £12,570 no tax to pay Basic Rate (£12,571 - £50,270) taxed at 20% Higher Rate (£50,271 - £125,140) taxed at 40% Additional Rate (over £125,140) taxed at 45% A common approach is to set your salary to £12,570, ensuring you utilise your full personal allowance without incurring income tax. Doing so means you have to pay employer National Insurance, but this means you retain your access to a state pension. Dividends Dividends are paid from your company’s retained profits, which are calculated after Corporation Tax (CT) has been applied. This means that once your limited company has deducted all allowable business expenses, including salaries, pension contributions, and operational costs, it will pay CT on the remaining profit. One CT has been accounted for, the remaining profit can be taken in dividends.
Dividend Tax Rates for 2025/26
Tax-free Dividend Allowance - £500 Basic Rate (income £12,571 - £50,270) taxed at 8.75% Higher Rate (income £50,271 - £125,140) taxed at 33.75% Additional Rate (income £125,140 and over) taxed at 39.35% Most limited company directors will take their tax-free allowance of £12,570 as a monthly salary, and then receive dividends from their business up to a value of £37,700, so their income of £50,270 remains within the Basic Rate, so their dividends are taxed at 8.75% Illustration Salary £12,570 Dividends £37,700 Income tax to pay £3,255 This is favourable when you consider that an employee earning £50,270 would pay £7,540 in income tax and £3,016 in Employee National Insurance.
Running Your Limited Company Tax Efficiently
Pensions Another tax-efficient way of extracting money from your business is to pay into a personal pension scheme. Your company can contribute up to £60,000 a year to your pension and you can carry forward unused allowances from the previous three years, provided you were a member of a pension scheme during those years. These contributions are deducted when calculating your profit, so they further reduce your CT liability. Making Your Spouse a Shareholder You can add a spouse as a shareholder, therefore splitting the dividend income according to the share ratio. However, be cautious about meeting HMRC’s spousal exemption criteria, which ensures the additional shareholder has full rights over the dividends and isn’t simply re-routing income back to you. We recommend you discuss this with your Workwell accountant before taking any action. Personal Expenses Another way to ensure your business is operating tax-efficiently is to ensure you claim allowable business expenses. If you’ve incurred expenses personally on behalf of the company, you can reimburse yourself for items such as accommodation, travel, meals and equipment such as IT hardware, software and subscriptions. It’s a good idea to pay these, where possible, via your business current account so that all claims are transparent. You should also keep copies of invoices and receipts. You can also claim business mileage at 45p per mile for the first 10,000 miles, then 25p per mile thereafter. Always keep receipts and clear documentation to support your claims but also take a closer look at our expense guides to see some of the rules around travel, accommodation and subsistence. Directors Loans If you need to withdraw more money from your business temporarily, you can borrow money via a director’s loan, but it must be managed carefully to avoid tax implications. Loans up to £10,000 are interest-free, any loan exceeding this may be subject to an interest charge set by HMRC (currently 3.75%). Exceeding this amount may mean you have to submit a P11D form and pay Class 1A National Insurance. Loans must be repaid within nine months of the company’s year-end to avoid a 33.75% CT charge on the outstanding amount, though this tax is refundable upon repayment of the loan. Putting Reserves To Work If you have built up reasonable cash reserves in your business, you can put this money to work for you.
- Business Savings Accounts You can open a business savings account and earn interest on your reserves. This bank account doesn’t need to be with whichever bank provides your business current account. You can shop around for the best interest rate and move your reserves between your current and savings accounts. If you don’t need immediate access to your reserves you may like to consider fixed-term accounts which offer higher interest rates.
- Start Another Business You can use reserves to fund a new start-up by loaning money to your new business. This can be helpful if you’ve saved enough money to invest in an asset such as a rental property, for example. There are rules around how the new business is set up (usually as a subsidiary of your existing limited company) and how the loans are made and repaid. But if this is a route you wish to explore, we will help you understand how to go about it.
Next steps
As we have shown, there are multiple avenues when it comes to remunerating yourself, each with its own tax implications, so it pays to plan ahead to ensure you are operating compliantly and tax efficiently. Our team of specialist contractor accountants is available to answer any questions you may have about operating tax efficiently. We can assist by looking at your individual circumstances and providing tailored advice and guidance. You can also use our Take-Home Pay Calculator.