Tax Tips For Company Directors

** New 2025-26 Edition Released 22nd July **

Tax Tips for Private Limited Company Directors

By Jennifer Adams FCG TEP ATT (Fellow)

This special guide has been written with the director of the micro or small-sized company in mind. It looks at possible tax planning strategies for such directors at each stage of a company’s life, from incorporation through to cessation when the director leaves, the company closes or it is sold to another company.

A director who is also a shareholder has flexibility over the level of income and how it is taken, combining salary, bonuses, dividends and benefits-in-kind with careful use of the director’s loan account. Written by Jennifer Adams, a professional business author and the proprietor of her own accountancy firm, and updated every year since it was first published in 2016, this guide explains the options, the calculations behind them and the tax traps to avoid.

How Are Company Directors Taxed?

When a limited company is formed, a new legal entity is created, separate from its owners (the shareholders) and from those who manage it (the directors), who may or may not be the same people. Being a director does not, in itself, make someone an employee: a directorship is an office, not necessarily an employment. A director with a service contract is taxed under the same rules as any other employee, although special rules decide when a director’s earnings are treated as paid.

In a private limited company it is usual, but not necessary, for a director also to be a shareholder. Salary and bonuses are subject to income tax and National Insurance Contributions (NICs) through PAYE but are deductible for corporation tax. Dividends do not attract NICs, but they are paid out of profits after corporation tax and can only be paid if the company has sufficient distributable profits.

Tax Traps for Company Directors

In the past, incorporation was synonymous with automatic tax savings. Successive governments have eroded those benefits, and the decision to incorporate is now typically made for commercial or legal reasons rather than for tax reasons. The guide’s comparison of a sole trader with a sole director company shows that, from a tax savings perspective only, incorporation may not be advantageous, especially at higher profit levels. Once a business trades through a company, the method that results in the least tax depends on each director’s circumstances.

The rules also contain traps. HMRC may challenge salaries and benefits that are not paid ‘wholly and exclusively’ for the trade, and can use the ‘settlements’ legislation against income diverted to family members. Dividends paid without enough distributable profits may be ‘unlawful’ and have to be repaid. An overdrawn director’s loan account not cleared within nine months and one day of the year end can trigger a 33.75% s 455 charge on the company, and winding up a company only to carry on a similar trade can see the capital distribution re-taxed as income.

So long as the correct procedure is followed, and confirmed by the correct paperwork, effective personal tax savings can be achieved. This guide shows company directors how.

What This Report Covers

Packed with tax-saving tips, practical points and 14 worked examples across eight chapters, the guide covers topics including:

• Starting a limited company
• Holdover relief
• Salary
• Dividends
• Bonuses
• Which is best: salary, bonus, dividend or a combination
• Withdrawing money from a company
• Employment allowance
• Salary sacrifice
• Directors’ loan accounts
• Directors’ pensions
• Alphabet shares
• Dividend waivers
• Phoenix companies
• Succession planning

And so much more.

Incorporation: company or sole trader?

A table compares the take-home pay of a sole trader with that of a sole director company at profits from £20,000 to £250,000, backed by a worked calculation, the corporation tax rates and marginal relief. The chapter then explains the capital gains tax reliefs available when a business is transferred to a company, namely incorporation relief, business asset disposal relief (including the restriction on goodwill) and holdover relief, and why no such relief is available for stamp duty land tax.

Salary, bonuses and dividends

How to work out the ‘optimal’ salary with and without the employment allowance, the two methods of calculating directors’ NICs, and how the timing of a bonus can give corporation tax relief in the year it relates to, even creating a loss and a tax refund. The dividend sections cover distributable profits, ‘unlawful’ dividends, the timing of interim and final dividends, dividends in specie and the dividend allowance, alongside IR35 and the factors that decide which combination works best.

Family salaries, rent, benefits and expenses

Paying a salary to a family member and how much to pay, using your home as an office or having the company pay rent for a room, and rent paid by the company for business premises the director owns personally or through a SIPP. Benefits-in-kind are covered in detail, from company cars, electric cars, vans and fuel to mileage allowances, trivial benefits, annual functions, courses, medical insurance and phones, together with salary sacrifice under the OpRA rules and childcare schemes.

Director’s loan account and pensions

What happens when a director’s loan account is overdrawn: the s 455 charge on the company, the benefit-in-kind charge on loans above £10,000, the 30-day and ‘motive’ matching rules, writing a loan off and tax planning when a loan cannot be repaid, with a practical checklist. The pensions chapter covers the annual allowance and its taper, company contributions to a directors’ pension, the money purchase annual allowance and automatic enrolment.

Alphabet shares and dividend waivers

How different classes of shares and dividend waivers allow a company to pay dividends to one shareholder without paying the same dividend to each shareholder, what HMRC looks for when it considers the ‘settlements’ legislation, why alphabet shares are best created on incorporation, and why a dividend waiver must be in place before the right to the dividend arises and be executed by deed.

Closing the company and succession planning

Extracting cash on cessation through a ‘strike off’, where capital treatment is limited to distributions of £25,000, or a members’ voluntary liquidation; the anti-avoidance rule aimed at ‘phoenix’ companies; and the conditions for business asset disposal relief on shares and associated disposals. The final chapter looks at passing the company on to the next generation through a purchase of own shares, gifting shares with holdover relief and business property relief, a family trust or a family investment company.

Who Will Benefit From This Report?

Any private limited company director who wants to save money on tax will benefit from this report, whether they are deciding to incorporate, running the company day to day, or planning to leave, close the company or pass it on to the next generation.

The report will also help tax professionals and accountants by giving them an in-depth understanding of the tax treatments for company directors to help maximise tax efficiency for their clients.

About Jennifer Adams FCG TEP ATT (Fellow)

Jennifer Adams FCG TEP ATT (Fellow) has been a professional business author for over 25 years, specialising in corporate governance and taxation. She is also the proprietor of her own accountancy firm and, as such, is well placed to advise on the tax problems that companies and their directors may face.

Jennifer has been a regular contributor to Tax Insider, Business Tax Insider and Property Tax Insider. She is the author of the Tax Insider book ‘101 Property Tax Tips’ and of the Tax Insider guides ‘How To Use Trusts To Reduce Property Taxes’ and ‘Investing In Property – Personal Or Company Ownership’.

Read an excerpt from this report: Paying A Salary To A Family Member.