How to Pay Yourself Tax-Efficiently as a Business Owner

Read More

Running a business gives you flexibility—but also decisions that can cost you thousands in tax if not handled correctly. This guide breaks down how UK business owners can pay themselves in the most tax-efficient way possible.

👤 Sole Trader

  • You = the business

  • Pay Income Tax + National Insurance (Class 2 & 4)

  • All profit (after expenses) is personal income

Updated 17/07/2025

🏢 Limited Company

  • Company = separate legal entity

  • You pay yourself via salary, dividends, or both

  • More tax planning options

Salary

As a director, a salary helps you:

  • Use your tax-free personal allowance (£12,570)

  • Build state pension credits

  • Reduce your company's Corporation Tax (as it's an allowable expense)

    🧠 Tip: Keep salary just under the NI threshold (~£12,570) to avoid personal/employee National Insurance.

Dividends

Take Dividends from company Profits

Dividends are paid from after-tax profits and aren’t subject to National Insurance. Here's how they’re taxed (2025/26):

📊 Dividend Tax Rates for UK Business Owners (2025/26)

💼 Dividend Band 💰 Tax Rate
🎁 First £1,000 (Allowance) 0%
📘 Basic Rate Band 8.75%
📗 Higher Rate Band 33.75%
📕 Additional Rate Band 39.35%

🧠 Dividends are paid from your company’s post-tax profits, and must be declared properly with board minutes and dividend vouchers.

✅ Efficient, but must be legally declared with proper documentation.

The Smart Mix: Salary + Dividends

Most directors use this approach:

  • Salary: up to £12,570 (tax-free)

  • Dividends: on profits, up to higher-rate threshold

This minimises:

  • Personal tax

  • NIC contributions

  • Total company tax bill

Other Tax-Efficient Ways to Take Money Out

📈 Pension Contributions – tax-deductible

💳 Expenses & Mileage – reclaim business costs

💵 Director’s Loan Repayment – tax-free if owed to you

🎁 Trivial Benefits – up to £300/year tax-free

RELATED CONTENT

Mistakes to Avoid

Common Pitfalls

❌ Taking dividends if no retained profits exist (illegal)

❌ Forgetting to run payroll for salary via PAYE

❌ Missing deadlines (especially around year-end)

Make It Work for You

Paying yourself wisely is about more than saving tax—it's about long-term financial control.

✅ Want advice specific to your situation?

📞 Call now:
01752 546732 / 07398 720140 / 07591 261639

📧 Email:
office@clearblueskyaccountancy.co.uk
info@clearblueskyaccountancy.co.uk