“Every business owner thinks they understand how to pay themselves,” she says. “But very few actually optimise it.”
According to Rachael, the end of the tax year provides the clearest financial picture for company directors. By March, accountants can see exactly how much salary and dividends have already been taken, alongside other income such as rental earnings, pensions or additional employment. This allows for accurate tax planning based on real numbers, rather than trying to predict what the year ahead might look like.
“In April you’re forecasting. In March we have the facts,” she explains. “Clarity leads to precision, and precision leads to tax efficiency.”
One of the most common mistakes directors make is unknowingly drifting into the £100,000 income threshold, where the personal allowance begins to taper away. This creates an effective marginal tax rate of around 60% between £100,000 and £125,140.
“It’s one of the harshest tax bands in the UK,” Rachael says. “If we see a client approaching £100k, we adjust their income strategy immediately. Falling into that band accidentally can be very costly.”
While dividends are often seen as the go-to option for directors, Rachael warns that the right balance between salary and dividends depends on several factors, including company profit levels, employment allowance, and other household income.
For businesses making between £50,000 and £250,000 profit, decisions become even more important due to the marginal corporation tax band where profits can effectively be taxed at 26.5%. In these cases, extraction decisions such as salary, dividends or pension contributions can significantly impact the final tax position.
“Every extraction decision matters,” Rachael explains. “This is why ‘just take dividends’ is lazy advice.”
She also highlights the importance of planning tax across the whole household rather than focusing solely on one individual.
“If income has to exceed £100k, it’s often more efficient for one partner to cross the threshold while the other remains below it,” she says. “Letting both partners drift into the 60% band simply doubles the inefficiency.”
The full discussion, including the different director scenarios and strategies for structuring pay, is explored in the podcast episode “Director Pay Secrets: How to Pay Yourself Properly.” The full article and episode can be found on the Chadwick Accountants website or by searching “FFS, For Finance’s Sake” on Spotify, Apple Podcasts, YouTube or Amazon.
