Careful planning before 5 April can improve tax efficiency, optimise allowances and avoid unexpected liabilities.
Salary v Dividend
For owner managed businesses, striking the right balance between salary and dividends remains essential. Salary can preserve entitlement to state benefits and utilise personal allowances. Income tax thresholds are set to remain unchanged for 2026/27. The Personal Allowance (PA) is £12,570. The higher rate threshold (at which the tax rate moves from 20% to 40%) is £50,270 and the top rate tax (45%) begins when income exceeds £125,140.
Dividends are generally taxed at lower rates than salary but must be paid from distributable profits. A year end profit review will confirm how much can be distributed safely. These rates are due to increase from 6 April 2026, as follows:
- Dividends falling in the basic rate band will be taxed at 10.75% rather than the current 8.75% rate.
- Dividends falling in the higher rate band will be taxed at 35.75% rather than 33.75%.
- There is no change to the dividend tax rate for top rate taxpayers, which will remain at 39.35% nor the dividend allowance, which taxes the first £500 of dividends at a nil rate.
Where appropriate, consider bringing forward dividends to make use of lower tax bands before 5 April.
Pension Contributions
Pension contributions remain one of the most tax-efficient ways to extract profits. An individual can claim tax relief on pension contributions up to the higher of: –
- 100% of their taxable UK earnings or.
- £3,600 gross (£2,880 net of basic ate tax relief) for those with no earnings.
Contributions exceeding the Annual Allowance (AA) of £60,000 would be subject to an AA charge at the individual’s marginal tax rate. This charge effectively claws back the tax relief on excess contributions.
However, for those with an annual adjusted income in excess of £260,000, the AA of £60,000 is usually tapered by £1 for every £2 of income in excess of £260,000, reducing to a minimum of £10,000. Employer contributions are included in adjusted income calculations.
Growth within a pension scheme is tax free and individuals can withdraw up to 25% of their pension pot as a tax-free lump sum upon reaching the age of 55 (57 from April 2028).
Pension contributions remain valuable for retirement funding and income tax relief, but their value for inheritance tax (IHT) planning will fundamentally change from 6 April 2027 when unused pension funds and death benefits become part of the taxable estate.
Please note that we do not offer pension advice, however, we can recommend independent financial advisors if you would find this helpful.
Directors Loan Accounts
Check the position before the year end
- Overdrawn balances may trigger additional tax charges
- Consider declaring dividends or repaying loans before the year end
Be mindful of anti avoidance rules around bed and breakfasting which prevent participants from temporarily repaying loans to avoid S455 charges, only to re-borrow shortly afterwards. Clearing via dividends avoids these rules.
State retirement
If you are looking forward to retirement, it’s a good idea to check out how much state pension you will get. To receive the full amount of the state pension, your national insurance contributions (NICs) record needs to contain 35 completed years. If you find that you have gaps in your NICs record you can pay voluntary Class 3 NICs. This payment generally needs to be made within six years of the gap year.
Making Tax Digital for Income Tax (MTD IT)
MTD IT is being phased in for landlords and the self-employed from 6 April 2026. Once enrolled, this will involve quarterly reporting of income and expenditure to HMRC via MTD compatible software.
The reporting quarters will be to 5 July, 5 October, 5 January and 5 April. A final statement, effectively a tax return, will also need to be submitted after the year end.
Final thoughts
Year-end remuneration planning is not simply about reducing tax – it is about ensuring your overall extraction strategy supports both your personal financial goals and your company’s long-term stability.
If you are considering maximizing your remuneration planning please contact your usual advisor on 01633 810081. You may prefer to email info@kilsbywilliams.com for more general enquiries and advice.
