With the new tax year now underway, this is the right time for company directors to set a clear and tax-efficient strategy for how they take income from their business.
Why this decision matters
For most company directors, how you pay yourself is one of the most important financial decisions you make each year.
It affects:
- how much tax you pay personally
- how much tax the company pays
- your cash flow and financial planning
- your long-term position, including pensions
Despite this, many directors fall into the habit of repeating the same approach each year without reviewing whether it is still appropriate.
With reduced allowances and increasing complexity, a more deliberate approach is now essential.
Start with the right mix of salary and dividends
For most directors, income is taken as a combination of salary and dividends.
Salary is:
- subject to income tax and National Insurance
- deductible for corporation tax
Dividends are:
- paid from post-tax profits
- not subject to National Insurance
- taxed at different rates personally
The key is not choosing one over the other but finding the right balance.
A structured approach at the start of the tax year allows you to:
- manage overall tax efficiency
- avoid ad hoc drawings
- ensure consistency across the year
Do not overlook the impact of reduced allowances
In recent years, the dividend allowance has reduced significantly. This means that dividends now become taxable at a much lower level than before.
As a result:
- taking large dividends without planning can lead to higher personal tax
- the margin for error is smaller
- timing and structuring matter more
This is why setting a strategy at the start of the year is more effective than adjusting later.
Make pension contributions part of the strategy
Pension contributions are often one of the most tax-efficient ways to extract value from a company.
For directors, employer contributions can:
- reduce corporation tax
- avoid National Insurance
- build long-term value
At the start of the year, consider:
- how much you want to contribute
- whether contributions will be regular or one-off
- whether unused allowances can be carried forward
Carry forward allows unused pension annual allowance from the previous three years to be used, provided you were a member of a registered pension scheme in those years.
For higher earning directors, tapering may reduce the available allowance, so this should be reviewed carefully.
Keep the director’s loan account under control
Where income is not structured properly, directors often end up taking money informally. This can lead to an overdrawn director’s loan account.
This creates potential issues:
- loans outstanding 9 months after the company year-end can trigger a tax charge
- balances above £10,000 can result in a benefit-in-kind if interest is not charged
A clear salary and dividend strategy reduces the likelihood of this happening and keeps the position clean throughout the year.
Ensure dividends are properly supported and documented
Dividends should not be treated as informal drawings.
Two key points:
- dividends must be supported by sufficient distributable reserves at the time they are declared
- they should be properly documented with board minutes and dividend vouchers
Failing to do this can create both tax and compliance issues.
Planning dividends in advance makes it easier to ensure they are:
- lawful
- aligned with company performance
- correctly recorded
Align your income with your wider tax position
Your income strategy should not be looked at in isolation.
It should consider:
- other sources of personal income
- use of personal allowance
- pension contributions
- potential capital gains
For example, taking additional dividends may not be efficient if it pushes you into a higher tax band unnecessarily.
A joined-up approach ensures decisions work together rather than against each other.
Avoid the “take it all later” approach
A common pattern is to leave decisions until later in the year and then take large dividends or make pension contributions in the final weeks.
This often leads to:
- rushed decisions
- limited planning options
- unnecessary tax exposure
By contrast, spreading decisions across the year:
- improves cash flow
- allows adjustments as circumstances change
- reduces pressure at year-end
Example
A director has historically taken a low salary and then withdrawn funds informally throughout the year, deciding on dividends at the end.
This has resulted in:
- an unclear director’s loan account
- inconsistent dividend documentation
- a larger-than-expected tax bill
In the new tax year, they adopt a structured approach:
- salary is set at the start of the year
- dividends are planned quarterly based on performance
- pension contributions are built into the plan
- the director’s loan account is reviewed monthly
The result is greater clarity, improved tax efficiency and no last-minute pressure.
What to do now
At the start of the tax year, take the time to:
- set your salary level
- plan how and when dividends will be taken
- consider pension contributions early
- review your director’s loan account position
- align your income with your wider tax position
This does not need to be complicated. It needs to be structured.
Key Point
How you pay yourself should be planned at the start of the tax year, not decided at the end. A clear salary, dividend and pension strategy helps reduce tax, avoid compliance issues and maintain control throughout the year.
Final Thought
A quote from our Principal, Sunil Aggarwal:
“Paying yourself efficiently is not about chasing the lowest possible tax outcome. It is about creating a structure that works consistently across the year.
When income is planned properly, decisions become clearer, risks are reduced, and the overall position is easier to manage.”
If you would like to review how you pay yourself and whether your current approach is still efficient, we can help you put a clear plan in place for the year ahead.
You can:
Email: info@drs-tax.com
Telephone: 020 8059 1891
Submit an enquiry via our Contact Us page
You can also book a free 15-minute consultation to review your position and next steps.