As a limited company director, one of the most important financial decisions you’ll make is how to pay yourself in a tax-efficient way. You’ve worked hard to build your business, so why let poor planning reduce your take-home pay?

At Carthy Accountants, we help business owners structure their income wisely, maximising earnings, reducing unnecessary tax, and ensuring compliance with HMRC regulations.

Want to keep more of your hard-earned money? Here’s how to do it the smart way.
Remember, we’ve got your back, every step of the way.

Salary vs. Dividends – What’s the Best Mix?

When paying yourself, you have two primary options:

• Salary – Paid through PAYE, subject to Income Tax and National Insurance Contributions (NIC).
• Dividends – Taken from company profits after Corporation Tax has been deducted, taxed at a lower rate than salary.

Most business owners combine both to strike the right balance between tax efficiency and long-term financial security.

Setting Your Salary

Taking a salary ensures you qualify for state benefits such as the State Pension while keeping your tax liability low. For 2024/25, the optimal salary for most directors is:

• £12,570 per year – The Personal Allowance threshold, ensuring no Income Tax is payable.
• £9,100 per year – If your company doesn’t qualify for the Employment Allowance, keeping you under the threshold for employer’s National Insurance.

Using Dividends to Reduce Tax

Dividends are taxed at a lower rate than salary and are not subject to National Insurance. In 2024/25, the Dividend Allowance is £500, and after that:

• 8.75% tax on dividends within the basic rate band (£12,570 - £50,270).
• 33.75% tax on dividends in the higher rate band (£50,270 - £125,140).
• 39.35% tax on dividends over £125,140.

By structuring your income wisely, you’ll get the best of both worlds - qualifying for state benefits while keeping your tax bill as low as possible.

Make Use of Tax Allowances

Employment Allowance

If your company has employees (beyond just you and a spouse), you may qualify for Employment Allowance, which offsets employer NIC by up to £10,500 per year—reducing your tax burden significantly.

Using a Spouse’s Allowances

If your spouse isn’t fully using their £12,570 Personal Allowance, consider making them a shareholder. This allows them to receive dividends tax-free, spreading the tax liability across your household.

Claiming Business Expenses

Running a business means you can claim certain costs to reduce taxable profits, including:

• Travel and mileage expenses
• Mobile phone and internet costs
• Home office expenses

• Professional development and training

By ensuring your company covers legitimate business expenses, you’ll reduce your tax liability and keep more cash in the business.

Consider Pension Contributions

A company pension contribution is one of the most tax-efficient ways to take money out of your business. Contributions:

• Aren’t subject to Income Tax or National Insurance

• Can be deducted from your company’s Corporation Tax bill

• Grow tax-free until retirement

For business owners looking to plan for the future, pensions provide significant tax savings today while securing financial freedom later.

Director’s Loan Account – Borrowing from Your Business

If you need additional funds beyond salary and dividends, a director’s loan might be an option.

• You can borrow up to £10,000 interest-free for up to 9 months.
• If left unpaid beyond this period, additional Corporation Tax charges apply.

Used wisely, a director’s loan can provide short-term flexibility, but it must be managed properly to avoid tax penalties.

Salary Sacrifice & Benefits in Kind

Instead of taking everything as salary, consider salary sacrifice schemes, where you exchange part of your salary for non-cash benefits such as:

• Company car (electric vehicles have major tax advantages!)

• Gym memberships

• Private healthcare

These can reduce taxable salary while still providing valuable perks. Smart structuring means you pay less tax while getting more benefits.

Keep Up with Tax Rule Changes

Tax rules change frequently, and staying ahead ensures you don’t get caught out by unexpected liabilities. Some key updates for 2024/25 include:

• Reduction in Dividend Allowance to £500 (from £1,000 in 2023/24).
• Increase in Corporation Tax to 25% for profits over £250,000.
• Changes to Business Asset Disposal Relief (BADR) – increasing the tax rate from 10% to 14% in 2025 and 18% in 2026.

At Carthy Accountants, we ensure our clients are always up to date, adapting their tax strategy to remain as efficient as possible.

Keep Your Records in Order

Accurate record-keeping is key to tax efficiency.

HMRC requires limited companies to document all income, expenses, dividends, and director’s loans. Cloud accounting software like Xero makes this process easy, ensuring you’ll get real-time financial insights and automated tax calculations.

If HMRC ever investigates, having clear, organised records will protect you from fines and penalties.

Regularly Review Your Strategy

The best tax strategy is one that adapts to your business. A yearly review ensures you’re always maximising tax efficiencies while aligning with your business goals.

At Carthy Accountants, we don’t just look at numbers - we help business owners plan ahead, adjust strategies, and get the business they want with confidence.

Get the Business You Want

Every business owner’s situation is different, which is why tailored tax planning is essential. You’ll get the best outcome when you:

• Combine salary and dividends effectively

• Utilise all tax allowances and deductions

• Plan for the future with pension contributions and tax-friendly benefits

• Keep clear financial records and adapt to changes

At Carthy Accountants, we make sure your business works for you, not the other way around.

Get in touch today and get the business you want.