Remuneration Planning – Salary, Dividends, Pensions

Owning and running a business is about creating something special, a growing business, exciting products or services, and often creating jobs to boost the local economy. But, as a founder, it’s also how you pay your bills and support your family.

When transitioning from employee to business owners, a key area to get right is how to pay yourself.

The golden rule? The money in your business bank account isn’t actually your money. It belongs to the company.

For this money to become yours, it must be extracted. Getting this wrong can cause a variety of problems, particularly from a taxation perspective.

This is why Remuneration Planning is so important.

What is Remuneration Planning?

Remuneration planning, in simple terms, is how you choose to take money out of your limited company. The goal is to ensure you are paid in a way that safeguards your company’s margins while protecting your personal income from unnecessary tax bills.

For a typical business owner, there are three key remuneration types:

Salary
Dividends
Pension contributions

There are other forms of remuneration for business owners, but for now, let’s focus on the big three.

Salary, dividends, and pension: The key differences

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Feature	Salary	Dividends	Employer Pension
Corp. Tax Relief?	Yes. Fully deductible as a business expense.	No. Paid from profits after Corporation Tax.	Yes. Usually treated as an allowable expense.
National Insurance?	Yes. Employer (15%) and Employee (8%) apply.*	No. Dividends never attract NI.	No. 0% NI for both company and director.
Personal Income Tax	20% / 40% / 45% (Standard bands)	8.75% / 33.75% / 39.35% (Lower rates)	None. Tax is deferred until you withdraw it later.
State Pension	Yes. Counts toward your 35-year record.	No. Does not count toward benefits.	No. (The contribution itself doesn't count).
Main Restriction	Must be processed via PAYE monthly.	Can only be paid if the company is in profit or has positive distributable reserves.	Annual allowance of £60,000 applies.

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* For 2025/26, the Employer National Insurance threshold has been reduced to £5,000, but the Employment Allowance has increased to £10,500 for eligible businesses, which can often wipe out this cost.

How to structure your income

Remuneration can be looked at as a funnel. Your goal is to fill the most tax-efficient buckets of this funnel first, before moving on to the more expensive ones from a tax perspective.

Step 1: The optimal salary for business owners

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Threshold	Amount	Why it matters to you
Lower Earnings Limit	£6,500	Get your State Pension "stamp" for free.
Secondary Threshold	£5,000	The point the company pays NI (unless you have Allowance).
Personal Allowance	£12,570	The point you start paying Income Tax.
Higher Rate Threshold	£50,270	Income above this jumps from 20% to 40% tax.

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As a standard practice, company owners/directors usually opt for a small salary. This seems counter intuitive at first, given the high value of the work they do for the company. So why is this common?

It’s because salaries are an allowable expense (i.e. they reduce the company’s Corporation Tax bill).

While not a one-size-fits-all strategy, most owners/directors aim for a salary that hits the National Insurance “lower earnings limit”. This means they don’t pay Income Tax or National Insurance on this amount, but still earn credits towards their state pension (this bit is important!).

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Tax Year	Lower Earnings Limit (Weekly)	Lower Earnings Limit (Monthly)	LEL (Annually)
2025/26	£125	£542	£6,500
2026/27	£129	£559	£6,708

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Step 2: The dividend top up

Once a salary has been set, the most common way to make up the rest of a director’s desired total remuneration is through dividends.

The principal benefit of dividends is that they don’t attract National Insurance.

However, they are paid out after-tax profits. In other words, the company has already paid Corporation Tax on them.

A popular strategy is to use the Personal Allowance and Dividend Allowance to keep the director’s personal tax rate as low as possible (which could be 8.75%).

However, it is important to note rates are changing…

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Tax Band	Your Total Income Range	2025/26 Rate	NEW 2026/27 Rate
Dividend Allowance	First £500 of dividends	0%	0%
Basic Rate	£12,571 to £50,270	8.75%	10.75%
Higher Rate	£50,271 to £125,140	33.75%	35.75%
Additional Rate	Over £125,140	39.35%	39.35%

Tax on Dividends (General Rules): GOV.UK: Tax on dividends

Dividend Allowance Freeze: HMRC: Dividend Allowance for 2025/26 and 2026/27

Dividend rate changes following the 2025 Autumn Budget

In the November 2025 Budget, Chancellor Rachel Reeves confirmed a 2% increase to both the basic and higher rates of dividend tax, starting April 2026.

This means Dividends remain more efficient for directors than Salary, but with a narrower gap.

If you have significant retained profits, it may be wise to consider whether accelerating dividend distribution before April 2026 works with your cash flow.

Step 3: Pension contributions

If you don’t need the cash immediately, one of the most powerful tools available to business owners is pension contributions.

There are some significant benefits to this approach:

The company gets Corporation Tax relief
The director pays no Income Tax of National Insurance on the contribution.
The money is able to grow in a tax-free environment.

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Feature	Personal Contribution	Company (Employer) Contribution
Funding Source	Your personal bank account (after-tax income).	The business bank account (pre-tax profit).
Max Limit	100% of your relevant UK salary (e.g., if salary is £12,570, limit is £12,570).	Annual Allowance (£60,000), regardless of your salary level.*
Corp Tax Relief	No. Paid from income you've already withdrawn.	Yes. Usually deductible as a business expense.
National Insurance	No. (Already paid when you took the salary).	0% savings. Avoids both Employer (15%) and Employee (8%) NI.
Income Tax	You get a 20% “top-up” (Relief at Source).	You pay 0% Income Tax on the contribution.

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*Did you know? If you have a particularly profitable year, you aren't strictly limited to the Annual Allowance of £60,000. Under the Carry Forward rules, you can mop up unused allowances from the previous three tax years.

For more information: HMRC Pensions Tax Manual (PTM055100) - Annual Allowance: Carry Forward

Additional ways to extract value

The “big three” outlined in this blog are not the only remuneration planning tools available, although they will make up the bulk of most profit extraction strategies. Additional options include:

Trivial benefits

These are small, non-cash gifts that don't need to be reported on a P11D and carry zero tax or NI for either you or the company.

To qualify, each “gift” must cost £50 or less (including VAT), cannot be cash, and must not be a reward for work performance. Directors of "close companies" (most small businesses) are capped at £300 per tax year.

Think of this as six £50 gift cards for your favourite shops or restaurants throughout the year.

‍Trivial Benefits: HMRC: Tax on trivial benefits

Director’s loan interest

If you have used your personal savings to fund your business, the company owes you a debt. Instead of just taking a dividend, you can charge the company interest on that loan.

The interest the company pays you is a deductible business expense, reducing your Corporation Tax.
The interest also qualifies for the Personal Savings Allowance, meaning you could receive up to £1,000 in interest completely tax-free if you are a basic-rate taxpayer (£500 for higher-rate).

You must charge a "commercial" interest rate, and the company must file a CT61 form quarterly to deduct 20% tax at source.

Electric company cars

There are some additional tax benefits if your company leases or buys a fully electric vehicle for you to use.

For the 2025/26 tax year, the Benefit-in-Kind (BIK) rate for EVs is just 3% but is set to rise gradually over the coming years, to 4% in 2026/27, then 5% in 2027/28.

Depending upon various specifics, a £50,000 electric car might cost a higher-rate taxpayer around £50 a month in personal tax, while a similar petrol car could cost over £500 a month.

Your company can often claim 100% First Year Allowances on the purchase of a new EV, meaning the entire cost of the car can be wiped against your profits in year one.

Look out for the new Electric Vehicle Excise Duty (eVED)

It’s not all good news, however. In the 2025 Autumn Budget, the chancellor announced the Electric Vehicle Excise Duty (eVED) will come into effect in 2028 and equal 3p per mile for battery electric cars and 1.5p per mile for plug-in hybrids. The rate per mile will increase annually in line with the CPI (Consumer Pricing Index).

Remuneration planning is an ongoing process

The UK tax rules are changing frequently, and advice that was great last year may no longer be suitable the next. Good remuneration planning is bespoke and updated regularly to reflect things as they are now, not how they were before.

If you want a bespoke remuneration review to ensure you aren't overpaying HMRC, send us a message today. We’ll take a look at your profits, your family’s tax allowances and your long-term goals to help you find your optimal remuneration plan.