Proactive Accountancy, Tax Planning for Limited Company Directors
Overview
Good accountancy is about more than submitting accounts and tax returns. Regular planning can help limited company directors claim appropriate reliefs, manage cash flow and choose how to use company profits.
There is no single strategy that suits every director. Salary, dividends, pensions and company benefits must be assessed together, taking account of company profits, personal income and future plans. Tax savings are not guaranteed.
This guide covers the 2026/27 tax year and was reviewed on 13th October 2026. It is general guidance, not personalised tax or investment advice.
Key Figures for 2026/27
Personal Allowance - £12,570 - Reduced by £1 for every £2 of adjusted net income above £100,000
Dividend allowance- £500 - Dividends still count towards tax bands
Dividend tax rates- 10.75%, 35.75% and 39.35%- Basic, higher and additional rates respectively
Corporation Tax- 19% small profits rate, 25% main rate- Marginal relief may apply between the relevant thresholds
Fully electric company-car benefit percentage- 4%- Applied to the relevant list-price-based value, not simply the purchase cost
Standard pension annual allowance- £60,000 - Includes employer contributions and can be reduced
1. Review Salary and Dividends Together
Salary can normally reduce taxable company profits, but PAYE and National Insurance may apply. For 2026/27, the standard annual employee National Insurance threshold is £12,570, while employer National Insurance generally starts above £5,000 at 15%. Directors have specific National Insurance calculation rules.
Employment Allowance can affect the calculation. A company cannot claim it if its only employee liable for employer Class 1 National Insurance is also a director.
Dividends are paid from available distributable profits after Corporation Tax. They are not a deductible company expense and must be properly declared and documented. Having money in the bank does not, by itself, mean a dividend can be paid.
Key information: There is no universal optimum director salary. Other income, allowances, pension objectives and company circumstances all matter.
2. Consider Employer Pension Contributions
A company can contribute to a director’s registered pension scheme. Qualifying employer contributions are generally exempt from employee Income Tax and do not normally attract employer or employee National Insurance.
Corporation Tax deductibility depends on the business-purpose conditions and is normally assessed when the contribution is paid. A fully deductible contribution does not mean a full refund of its cost. For example, a £10,000 deduction at a flat 25% Corporation Tax rate saves £2,500 in tax.
The standard £60,000 annual allowance covers relevant pension saving across schemes, including employer contributions. High income or flexible access to pension benefits can reduce the available allowance. Unused allowance from the previous three tax years may be carried forward subject to conditions, including membership of a registered pension scheme in those years. Carry forward cannot increase the money purchase annual allowance.
Warning: Pension funding is retirement provision, not immediately available take-home cash. Check affordability, access restrictions and allowance history before payment. Seek regulated advice where pension-product recommendations are needed.
3. Check Business Expenses Carefully
Potential deductible costs include qualifying business travel, accountancy fees, insurance, software, training and professional subscriptions. Home-working arrangements, mobile phones and legal costs have their own conditions.
An identifiable business part of a mixed-use cost may qualify, but not every dual-purpose cost can simply be apportioned. Equipment and other capital expenditure may require capital allowances rather than an ordinary expense deduction.
Company tax relief, employee benefit exemptions and VAT recovery are separate questions. Personal costs paid by the company may create remuneration, a taxable benefit or a director’s loan.
Practical action: Retain invoices and evidence of business purpose. Review uncertain costs rather than assuming that company payment makes them deductible.
4. Compare the Full Cost of an Electric Company Car
For 2026/27, a fully electric company car available for private use has a 4% benefit percentage. The director’s tax depends on the taxable benefit and their Income Tax rate. The company normally also pays Class 1A National Insurance on the benefit.
Qualifying new and unused zero-emission cars may receive 100% first-year capital allowances, subject to the rules and availability period applying when purchased. Second-hand cars do not qualify for that particular allowance, and leasing has different treatment. Cars do not qualify for the Annual Investment Allowance or full expensing.
Electric vehicles have been subject to Vehicle Excise Duty since 1st April 2025. VAT on buying a car is usually blocked where private use is available; leasing also has restrictions.
Warning: A low benefit percentage does not prove that a car is cheaper than salary. Compare purchase or lease costs, finance, depreciation, charging, insurance, VAT, company tax relief, personal tax and employer National Insurance.
5. Plan Throughout the Year
Corporation Tax normally uses a 19% small profits rate for profits up to £50,000 and a 25% main rate above £250,000, with marginal relief potentially available between those limits. Limits are reduced for associated companies and short accounting periods, and special rules can apply.
A mid-year review and another before the company year end can help identify decisions that need action in advance. Review sooner if profits, personal income or business plans change. The company year end and the personal tax-year end, 5th April, are not necessarily the same.
Step-by-Step Procedure
Bring bookkeeping up to date and forecast company profits, cash requirements and personal income.
Compare salary and dividends, including both company and personal taxes, National Insurance and Employment Allowance eligibility.
Check pension allowance history, affordability and contribution timing before making employer payments.
Review expenses, evidence, benefits and capital allowance treatment.
Obtain a full-cost comparison before buying or leasing a company car.
Agree actions and deadlines with your accountant, document decisions and keep sufficient funds for tax liabilities.
Frequently Asked Questions
What is the ideal director salary in 2026/27?
There is no single answer. Other income, National Insurance, Employment Allowance eligibility and company profits can change the result. A salary equal to the Personal Allowance is not automatically free of employer National Insurance.
Can my company pay into my pension?
Yes. Qualifying employer contributions can be tax-efficient, but company deductibility, your pension allowances and payment timing must be checked. Pension money is not immediately available to spend.
What happens if an expense does not qualify?
HMRC may deny company tax relief. Depending on the facts, the payment could also be remuneration, a taxable benefit or a director’s loan. Incorrect returns may need correction.
Is an electric company car cheaper than extra salary?
It can be, but not always. The 4% benefit percentage for 2026/27 is only one part of the calculation. Compare the full cost and tax treatment of each option.
How often should my accountant review my tax position?
A mid-year and pre-year-end review is a useful starting point, not a legal requirement. Significant changes may justify more frequent reviews.
What is the Corporation Tax rate?
The main rate is 25%, with a 19% small profits rate and potential marginal relief. Associated companies, accounting-period length and other conditions affect the applicable thresholds and treatment.