Profit extraction for director-shareholders: Salary, dividends or alternatives?

In this article we explore the key profit extraction options to consider ahead of the 5 April 2026 tax year end, and those that may be relevant in the following tax year.

Dividends: Still popular, but getting more expensive

Dividends have traditionally been a tax-efficient way to extract profits, but this is becoming less attractive. From 6 April 2026, dividend tax rates increase for basic and higher rate taxpayers, while the Dividend Allowance remains just £500.

The 2% increase for all but the additional rate will continue to make profit extraction via dividend payment more expensive.

In summary:

• Dividends are paid from post-tax profits, an important consideration given current Corporation Tax rates.
• Overall, dividends are still subject to lower Income Tax rates than non-savings income.
• No National Insurance Contributions (NICs), a potential saving for the director-shareholder as employee, and the company as employer.
• Lower tax rates than salary — but the gap is narrowing.
• Not classed as earnings for pension contributions.

Higher dividend tax rates will also increase the cost of s455 tax on overdrawn directors’ loan accounts. This is the tax due on unpaid directors’ loan accounts, and is paid at the dividend upper rate. We cover this in more detail in our full year-end tax guide.

Salary: More relevant than it used to be

Salary and employer NICs are deductible for Corporation Tax purposes and remain an important planning tool. While many companies have historically paid a low salary to preserve State Pension entitlement, decisions now also need to factor in:

• Higher employer NIC costs from April 2025
• The widening gap between employer and employee NIC rates
• The increased Employment Allowance of up to £10,500

A wide range of issues, including the level of any other income; the personal circumstances of each director; company performance, activities and group structure, will all need to be taken into account.

Adapting for National Insurance costs

Planning to minimise these costs continues to be important following the increase in employer NICs from 6 April 2025.

Though the changes do not impact director-shareholders in their capacity as employees of the company, they do impact them in their role as owner-employers. The overall impact will depend on your individual circumstances, and we can help you review the National Insurance position throughout your business.

Bonuses: Flexible, but NICs-heavy

Bonuses are subject to Income Tax and NICs for the individual, and employer NICs for the company. However, they are fully deductible for Corporation Tax and can be used to manage taxable profits, provided timing and documentation are handled correctly.

Use bonus timing to your advantage

The timing of a bonus determines when it is chargeable to tax for the director-shareholder.

You may be able to defer taxation to a later tax year, or include it in the current tax year, depending on how and when the bonus is declared. It may be possible to keep a deduction for the bonus in the current accounting period for Corporation Tax purposes, so long as the bonus is paid within nine months of the company year end.

It is important to get the timing and procedure right, and we can advise on the best way to proceed.

Pension contributions: Often the most tax-efficient option

Employer pension contributions continue to offer significant advantages:

• Corporation Tax relief and NIC savings for the company
• Tax-free benefits for the director-shareholder
• Contributions can also be made for family members employed in the business

Pensions provide significant planning opportunities, though thinking now needs to take account of the extension of Inheritance Tax to unused pension funds and death benefits from 6 April 2027.

Contributing to a personal pension, however, continues to make sense. If the company makes employer contributions to a personal pension for a director-shareholder, the advantage is two-fold. The company (as employer) gets tax relief and saves on NICs. The director-shareholder (as employee) gets a benefit free of tax and NICs. Note also that employer contributions are taken into account in determining the recipient’s annual allowance for pension purposes.

The bottom line

There is no single “best” method. The most tax-efficient mix of salary, dividends, bonuses and pensions will depend on your personal tax position, company performance and family circumstances.