As a director or shareholder of a limited company, structuring your remuneration package in a tax-efficient way is crucial to maximising your income while minimising your tax liability.
The UK tax system offers a range of opportunities to reduce your personal tax burden, but careful planning is needed to ensure you take full advantage of these opportunities.
Rachael Ball, Director at LHP guides you through some key strategies for remuneration tax planning, helping you optimise your after-tax income and ensuring full compliance with UK tax law.
1. Salary vs. Dividends: Finding the Right Balance
One of the most common tax-efficient ways to take remuneration from a limited company is by balancing a salary and dividends. This combination allows you to reduce your overall tax burden, while also considering factors such as company profitability and National Insurance Contributions (NICs).
Salary: Salaries are subject to Income Tax and NICs but are also deductible as a business expense, reducing your company’s taxable profits. However, salaries can be subject to higher rates of tax and NICs, particularly if they exceed the personal allowance or push you into higher tax bands.
Dividends: Dividends are a popular form of remuneration for company owners, as they are subject to lower tax rates than salary income and are not liable for NICs. Dividends can only be paid out of post-tax profits, but they provide a more tax-efficient way to withdraw funds from your company.
Optimising Your Remuneration:
Salary:
For the 2024/2025 tax year, it is typically advisable for directors to take a salary up to the National Insurance primary threshold (£12,570). This ensures you qualify for state benefits (such as the state pension) without incurring substantial NICs or Income Tax.
If you have not yet taken a salary this year then please do consider this before the end of the tax year.
Dividends:
After taking a tax-efficient salary, the remaining funds can be taken as dividends. For the 2024/2025 tax year, the dividend allowance remains at £1,000.
Beyond this, dividends are taxed as follows:
Basic rate (up to £50,270): 8.75%
Higher rate (£50,271 to £125,140): 33.75%
Additional rate (over £125,140): 39.35%
By taking a salary up to the threshold and using dividends for the remainder of your income, you can reduce your overall tax burden, particularly if you are a basic-rate taxpayer.
2. Pension Contributions: A Tax-Efficient Way to Save for the Future
Making pension contributions is a highly effective way of reducing both your personal tax liability and your company’s corporation tax bill. Contributions made by the company into your pension scheme are an allowable business expense, reducing the company’s taxable profits.
Annual Allowance: For the 2024/2025 tax year, the annual allowance for tax-free pension contributions is £60,000. Contributions beyond this will be subject to tax at your marginal rate, so it’s crucial to ensure you stay within this limit unless you have unused allowances to carry forward.
Carry Forward: If you haven’t fully utilised your pension allowance in the last three tax years, you can carry forward unused allowance from those years, potentially allowing for larger contributions without incurring a tax charge.
Pension contributions are also exempt from NICs, making them a highly tax-efficient form of remuneration. Please do take advice from a financial advisor in relation to pension contributions.
3. Utilising the Employment Allowance
The Employment Allowance provides small businesses with up to £5,000 off their employer NICs. This is particularly beneficial for small limited companies where the directors are the only employees. However, the allowance is only available to companies where the directors are the only employees, and the total employer NICs liability does not exceed £100,000.
This has been increased in the recent budget for the 2025/2026 tax year.
Please see our budget summary here
4. Benefits in Kind (BIKs)
Providing benefits in kind (BIKs) to directors or employees can be a tax-efficient way to enhance remuneration.
Benefits such as company cars, private health insurance, and other perks are subject to Income Tax, but there are ways to minimise the tax impact:
Electric Vehicles (EVs): If you provide a company car, electric vehicles continue to be a very tax-efficient option. For the 2024/2025 tax year, the benefit-in-kind (BIK) rate for electric cars is set at 2%, significantly lower than for traditional petrol or diesel cars.
Health Insurance and Other Perks: These benefits can often be provided with minimal tax implications if structured correctly. It's important to ensure that the company’s provision of these benefits complies with HMRC rules.
5. Director’s Loans
Directors of limited companies can take out a director’s loan from the company.
However, it’s important to understand the tax implications of using this method to withdraw funds.
Loan Interest: If you take a loan from the company, the loan must generally be repaid within nine months of the company’s year-end. Otherwise, there could be tax consequences, including a potential surcharge of 33.75% on loans over £10,000 that are not repaid within the required timeframe. Additionally, if the loan is interest-free or offered at a rate below the official rate, it could be treated as a benefit in kind, triggering additional tax charges.
Loan Repayments: Any repayments made to the loan account need to be tracked accurately. Failure to repay the loan or account for it properly could result in additional taxes and potential penalties.
6. Capital Gains Tax Planning
If you are considering selling shares in your company or disposing of other business assets, Capital Gains Tax (CGT) planning is crucial.
There are several tax reliefs available that can reduce your CGT liability:
Business Asset Disposal Relief (formerly Entrepreneurs' Relief): For the 2024/2025 tax year, this relief allows you to pay 10% CGT on the sale of qualifying business assets, such as shares in your company. This relief applies if you meet certain criteria, such as holding at least 5% of the company’s shares and voting rights for at least two years prior to the sale.
Changes made by the Budget
For disposals made on or after 6 April 2025, gains eligible for BADR will be taxed at 14% and, from 6 April 2026, gains eligible for BADR will be taxed at 18%. This means that, from April 2026, BADR relief will be in line with the lower main rate of CGT, which rose from 10% to 18% in the Budget. There was no change to the £1 million lifetime limit.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS): These schemes offer significant tax reliefs on gains made from the sale of shares in qualifying companies, making them an attractive option for business owners looking to sell or restructure however, financial advice should be taken.
7. Dividend Splitting Between Family Members
If you have family members who are shareholders in your company, it may be possible to reduce the family’s overall tax liability by distributing dividends to them.
For example, if your spouse or children are shareholders, you can pay them dividends up to their personal allowance (£12,570) or the dividend allowance (£1,000) tax-free.
However, it is important to ensure that any dividend distribution is proportionate to the shareholder’s ownership in the company. HMRC may challenge dividend splitting arrangements that it deems to be primarily for tax avoidance purposes.
8. Avoiding Excessive Salary Drawings
It’s essential to avoid drawing excessive salary that pushes your income into higher tax bands or leads to substantial NICs. Similarly, be cautious of accumulating excessive amounts in your director’s loan account, as this could lead to unwanted tax consequences. It’s important to manage your salary and loan withdrawals carefully to ensure they remain within acceptable limits and avoid unnecessary tax charges.
Conclusion: Planning Ahead Is Key
In conclusion, remuneration tax planning for limited company directors and shareholders in the UK requires careful consideration of how to structure your income, take advantage of available allowances and exemptions, and ensure your company remains compliant with the latest tax rules.
The 2024/2025 tax year presents several opportunities for tax-efficient remuneration before the end of the tax year, from balancing salary and dividends to making pension contributions and utilising tax reliefs for capital gains. As every individual and business is unique, it’s important to seek professional advice tailored to your specific circumstances.
If you would like to discuss your remuneration strategy in more detail, or if you have any questions, please don’t hesitate to get in touch. With the right planning, you can maximise your wealth while minimising your tax burden.
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