Directors’ cash extraction – tax-efficient strategies for the new tax year

Higher dividend tax rates and changes to Business Asset Disposal Relief (BADR) mean that effective tax planning plays a key role in extracting profits from your limited company efficiently. 

How can directors extract cash tax efficiently? 

As a company director, the three main ways you can take money from your limited company are: 

• salary 
• dividends  
• pension contributions  

Each of these forms of remuneration is taxed differently.  

The most tax-efficient mix will depend on factors such as your company’s level of profit (which affects the corporation tax rate payable) and whether you qualify for the Employment Allowance. This allowance can reduce your company’s annual Class 1 National Insurance Contributions (NICs) liability by up to £10,500 per tax year, making salary more efficient in some cases. 

Taking a salary as a director 

Directors with no other income often choose to pay themselves a salary equal to the personal allowance (£12,570) and the employee’s NICs threshold. This level of salary ensures you receive credit towards the state pension, as it exceeds the Lower Earnings Limit (£6,708).  

At this level, no employee NICs are due, as the salary remains below the Primary Threshold. Employer’s NIC may still apply, but both the salary and any employer’s NICs are deductible expenses for the company, reducing profits before corporation tax is calculated.  

Dividends – what’s changed? 

The tax-free dividend allowance has fallen sharply in recent years and now stands at just £500. Dividend tax rates have increased for basic and higher rate taxpayers from April 2026:

Tax band	2025/26	2026/27
Basic rate	8.75%	10,75%
Higher rate	33.75%	35.75%
Additional rate	39.35%	39.35%

Dividends are paid from profits after corporation tax, meaning they are not tax-deductible for the company. They also remain outside the scope of NICs, which is why they are often used as part of a tax-efficient remuneration strategy. 

Dividends must also be properly declared and only paid from available distributable profits, and the timing of dividend payments can affect which tax year they fall into. 

Using pension contributions to extract cash tax efficiently 

Employer pension contributions are one of the most tax-efficient ways for directors to take value from their company.  

They are typically deductible for corporation tax and are not subject to income tax or NICs when paid. 

The Lifetime Allowance was abolished in April 2024, so there is no longer a limit on the total size of your pension pot. However, limits still apply to tax-free withdrawals.  

Key limits include: 

• Lump Sum Allowance: £268,275  
• Lump Sum and Death Benefit Allowance: £1,073,100  
• Annual Allowance: usually £60,000 (subject to tapering for higher earners)  

These rules restrict how much can be contributed and withdrawn tax-efficiently over time.

What did the last Budget and Spring Statement announce for directors? 

Recent confirmed changes affecting directors include: 

• Income tax thresholds remain frozen, increasing tax pressure over time via fiscal drag (with some variations in Scotland)  
• BADR rate increased to 18% from 14% - a key capital gains tax relief for business owners 
• Corporation tax late filing penalties have increased from April 2026  
• Changes to capital allowances, including first-year and main rate adjustments. 

Salary vs dividends vs pension contribution – which is best in 2026/27? 

In most cases, a combination of a modest salary, dividends at least up to the basic rate band, and company pension contributions provides the most tax-efficient balance.  

A small salary makes use of the personal allowance and helps maintain NICs credits. Dividends are not subject to NICs and are taxed at lower rates than salary, while company pension contributions reduce corporation tax and are not taxed personally when paid. 

By contrast, taking a larger salary does reduce corporation tax, but it also triggers higher income tax and both employee and employer NICs. With fewer dividends and little pension planning, the overall tax cost is usually higher. 

Common mistakes directors make 

Some common mistakes to avoid when extracting money from your company include: 

• Taking only dividends and no salary, missing out on the benefits of a modest salary (such as state pension entitlement).  
• Ignoring pension contributions and losing a highly tax-efficient way to extract profits.  
• Poor timing before the year-end, such as delaying dividends or bonuses and missing opportunities to use allowances.  
• Not planning ahead for April tax changes, which can affect rates, thresholds, and overall tax efficiency. 

When should you speak to an accountant? 

You should speak to an accountant as early as possible to ensure you are extracting profits in the most tax-efficient way.  

Tax rules and rates change regularly, and TaxAssist Accountants have a wealth of experience advising company directors on how to structure salary, dividends, and pension contributions in the most effective way. Call us on 020 3988 0580 or use our online contact form here. 

Last updated 1 May 2026 | First published 1 May 2026

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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