Being a director of a limited company in the UK comes with a host of important responsibilities, but also valuable opportunities as well. One of the most rewarding aspects of this role is the ability to legally minimise your tax liabilities through smart planning and efficient financial management.
Here’s a practical guide to help you maximise your tax savings while staying compliant with UK regulations.
Understanding the UK Tax System for Limited Companies
Before diving into strategies, it’s essential to understand the basics of how limited companies are taxed in the UK.
Corporation Tax
Limited companies pay corporation tax on their profits. The rate is 25% for most companies, though a small profits rate of 19% applies to those with profits of £50,000 or less.
Personal Income Tax
As a director, your personal income tax depends on how you pay yourself, which is typically a combination of salary and dividends.
Dividend Tax
Depending on your other income, dividend income is taxed at 8.75% / 33.75% / 39.35%, but it’s important to account for the dividend tax-free allowance (£500 in 2024/25).
By understanding these fundamentals, you can better tailor your tax strategy to your company’s unique situation.
Salary vs Dividends: The Tax-Efficient Approach
One of the most common questions for limited company directors is how to pay themselves: salary, dividends, or a mix of both?
Salary
Paying yourself a salary allows you to benefit from National Insurance Contributions (NICs) and accrue State Pension benefits. A common approach is to set your salary at the NIC threshold (£12,570 in 2024/25) to avoid paying NICs while keeping these benefits intact. The company also gets corporation tax relief on the salary paid. If the company is into marginal / main rates of corporation tax then tax relief on the salary can be beneficial.
Dividends
Dividends are not subject to NICs and benefit from the dividend allowance. If other income is lower, then within the basic rate tax band – the income tax rate is lower. Dividends are not a tax deductible expense in calculating the company tax so the company does not benefit from tax relief in the same way it would for salary costs.
Pro Tip
Work with an accountant to strike the right balance between salary and dividends, considering personal allowances, corporation tax, and other factors.
Utilising Tax Allowances and Reliefs
The UK tax system provides several opportunities for directors to save on taxes through allowances and reliefs on the company’s income as well as their own income:
Annual Investment Allowance (AIA)
Claim up to £1 million on qualifying equipment and machinery purchases, reducing taxable profits.
R&D Tax Credits
If your company invests in innovation, you could claim R&D tax relief, significantly reducing your corporation tax bill.
Capital Gains Tax (CGT) Relief
If you sell company shares or assets, consider using allowances like Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) for reduced CGT rates.
Employment Allowance
If applicable, this allows small companies to reduce their NIC bill by up to £5,000.
Making Pension Contributions
Contributing to a pension scheme is not just a smart retirement strategy, it’s also a way in which directors can benefit from profit extraction in a tax-efficient way.
Corporation Tax Relief
Pension contributions made by your company are considered an allowable business expense, reducing taxable profits.
No National Insurance Contributions
Unlike a salary, employer pension contributions don’t attract NICs, making them an attractive option.
End-of-Year Tax Planning Checklist
To ensure you’re maximising tax savings, use this checklist before the tax year ends:
Review Allowances
Ensure you’ve fully utilised your personal allowance, dividend allowance, and other applicable reliefs.
Plan Dividends
Declare dividends in advance to optimise the use of lower tax bands.
Consider Equipment Investments
Purchase any necessary equipment to take advantage of the AIA.
Maximise Pension Contributions
Contribute within annual limits (£60,000 in 2023/24) to gain tax relief.
Review Director Loan Accounts
Avoid triggering additional tax charges by repaying overdrawn director loans on time.
Using an Accountant
Navigating the complexities of the UK tax system as a limited company director is challenging, but you don’t have to do it alone. An accountant can provide tailored advice, ensuring you make the most of tax-saving opportunities while focusing on growing your business.
By understanding the tax landscape and taking proactive steps, you can optimise your financial position and keep more of your hard-earned income. Start planning today to make the most of your limited company’s tax-saving potential!
How CRM Can Help
At CRM Accountants, we go beyond just managing accounts and tax returns. We specialise in helping limited company directors optimise their tax savings, grow their businesses, and plan effectively for the future.
Our approach ensures you stay fully compliant with legal requirements while taking advantage of every opportunity to reduce your tax liabilities. From improving cash flow to increasing profits and utilising available tax reliefs, we focus on strategies that make a real difference to your bottom line.
But it’s not just about your business. We’re here to help you plan for the bigger picture. Whether you’re saving for retirement, securing your family’s future, or creating more time for what matters most, we work with you to align your business success with your personal goals.
With expert advice and a practical, supportive approach, we’re dedicated to helping you build a stronger business and achieve the lifestyle you want.
Next steps
You can count on CRM for expert advice and tailored assistance with your money matters. We’re here to simplify your financial journey – get in touch either by completing our contact form or giving us a call at 01865 379272.
