Tax Planning for High-Earning Company Directors
Earn a pound too many, and the taxman takes roughly 60p of it. That is not a misprint. Between £100,000 and £125,140 of income, the Personal Allowance disappears at £1 for every £2 you earn, and the effective rate on that slice of income reaches about 60%. It is higher than the rate for anyone earning more than you.
Tax planning for high earners is not about clever tricks. It is about knowing where the rates change, which allowances are still there for you, and making decisions in the right order and at the right time. I have spent years sitting across the table from company directors in Tunbridge Wells, Sevenoaks, Tonbridge and Maidstone, and the pattern is always the same. Those who plan do far better than those who don't. And the ones who don't plan are almost always surprised by the size of their bill in January.
This guide is for directors who take home more than £100,000 a year, or whose companies make that much profit. It covers how to plan your income, why pension contributions are so powerful, how to take dividends sensibly, how to think about investments, and why you need to start long before the tax year ends. I have used the 2026–27 rules and worked through a full example so you can see how the numbers behave.
"High earner" means different things in different places. In Kent and the South East, where salaries and house prices are well above the national average, plenty of people reach six figures. But for tax purposes, the thresholds that matter are very specific.
At £60,000 of adjusted net income, the High Income Child Benefit Charge begins, and the charge reaches the full amount of the Child Benefit at £80,000. At £100,000, the Personal Allowance starts to taper. At £125,140 it is gone completely and the additional rate of 45% begins on taxable income above that figure. And at £200,000 of threshold income and £260,000 of adjusted income, the pension annual allowance starts to be reduced.
Most of the income tax thresholds are frozen until April 2031, which means that as pay rises, more people are dragged into them every year. If you are close to any of them, the planning below is especially valuable. Our guide to the £100,000 tax trap explains the first of those cliffs in more detail.
Income planning is about deciding how much you take, in what form, and in which tax year. The company and the director are separate taxpayers, and good planning uses that.
For most directors with a profitable company, the best salary is still the Personal Allowance of £12,570. Taking this amount means you pay no income tax and no employee National Insurance, and the company pays a small amount of employer National Insurance on the part above £5,000. It also protects your State Pension record, because the earnings exceed the level needed for a qualifying year. Our guide on how much salary a company director should take explains why anything higher usually costs more in tax than it saves, even for higher rate taxpayers.
The remainder of your income normally comes as dividends, which are taxed at 10.75%, 35.75% and 39.35%, from 6 April 2026. Dividends do not attract National Insurance. They are also not a deductible cost for the company, which pays Corporation Tax first. I cover this in the dividends section below.
If your husband, wife or civil partner has little or no other income, they have a Personal Allowance of £12,570, a £500 dividend allowance, and a basic rate band of £37,700 that is taxed at only 10.75% on dividends. Giving them shares in the company can use all of that.
Let me give you an example. Suppose a director would otherwise take an extra £30,000 of dividends, taxed at 35.75%. That costs £10,725 in tax. If the spouse owns shares and receives that £30,000 instead, with no other income, the tax is about £1,820. The family saves about £8,905.
But this works only if it is real. The spouse must actually own the shares. They must carry full rights to dividends, votes and capital. The money must be theirs to spend. An outright gift of ordinary shares between spouses is generally outside the anti-avoidance rules on settlements, but arrangements with limited rights, or where the money flows straight back to you, can be challenged. Always take advice before you issue shares, and keep proper minutes and records.
Income is taxed in the year it is received. A director whose income would otherwise tip over £100,000 or £125,140 can sometimes defer a dividend until after 5 April, or bring one forward into a lower-income year. Dividends must be declared and paid properly, with minutes and vouchers, and they need enough distributable profits. You cannot simply backdate them. Our guide on dividend tax for directors explains the rules.
Crossing £100,000 also affects Tax-Free Childcare and the extended 30 hours of free childcare in England, which are lost if either parent's adjusted net income goes over £100,000. For a Sevenoaks family with two young children, that can make a real difference. An accountant who looks at the whole household, not just the company, will find these things.
If I could only give a high-earning director one piece of tax advice, this would be it. A pension contribution paid by your company is the most powerful tax planning tool available to you.
When the company pays into your pension, the contribution is generally deductible for Corporation Tax, it isn't treated as your income, and there is no National Insurance on it. The money grows in the pension largely free of tax. And, importantly, it reduces the profit that would otherwise be paid out as a dividend, so it can pull your income below the £100,000 and £125,140 thresholds.
The annual allowance for most people is £60,000, and you can carry forward unused allowance from the previous three tax years if you were a member of a registered scheme in those years. A director who has not contributed for a while may therefore be able to make a much larger payment in one go. Employer contributions are not limited by your salary, but they must be justifiable as a business expense, and they should be reasonable in relation to your duties and the profits of the company. Our guide to paying into your pension through your company goes through this.
Let me show you with the example I'll use again at the end. Suppose a Sevenoaks IT contractor's company makes £200,000 of profit before paying him anything. He takes a salary of £12,570 and pays himself everything else as dividends.
With no pension contribution, the company pays about £45,618 in Corporation Tax. He receives dividends of about £140,676, and pays about £47,481 in income tax, because his income is over £125,140 and he has lost the whole Personal Allowance. His total take-home is about £105,765.
Now suppose the company pays £40,000 into his pension. Corporation Tax falls to about £35,018. His dividends fall to about £111,276, and his income tax falls to about £35,668, because the lower income lets him recover part of his Personal Allowance. His take-home is about £88,178.
So he has £40,000 in the pension, but his take-home fell by only about £17,587. In other words, £40,000 of pension cost him about 44p in the pound. The total tax paid by the company and him falls by about £22,413.
If the company pays the full £60,000 allowance, his take-home is about £82,041, a reduction of about £23,724. That is 40p in the pound for the pension.
I must be honest here. Pension contributions defer tax. They do not eliminate it. When you take money out, 25% is normally tax-free, up to the lump sum allowance of £268,275, and the rest is taxed as income. If the £40,000 above were later withdrawn at a basic rate of 20%, it would produce about £34,000 after tax, before any growth. That is still a good return on a net cost of about £17,587. But the rates when you retire may be different, and the rules can change.
There are other points to remember. You can't normally take the money until the minimum pension age, which is 55 now and rising to 57 from April 2028. If you have already started drawing flexible benefits, your annual allowance may be cut to £10,000. And from 6 April 2027, most unused defined contribution pension funds will be brought into your estate for Inheritance Tax, with an exemption for transfers to a spouse or civil partner and to charity. A pension is no longer a way of passing wealth on completely free of tax.
If your adjusted income is above £260,000, the annual allowance is reduced by £1 for every £2 above that level, down to a minimum of £10,000. Very high-earning directors need to plan their pension payments carefully, because an overpayment can lead to a tax charge.
Dividends are the main way most owner-managed company directors take profit. They are straightforward, but the tax sits in several layers, and a bit of planning goes a long way.
The company pays Corporation Tax on its profits first. For profits between £50,000 and £250,000, the effective rate is 26.5% on the marginal slice, and the company's dividend is paid from what remains. You then pay dividend tax on top: 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above £125,140. The first £500 is tax-free. Dividends are taxed as the top slice of your income.
For a company in the marginal band, that means the combined tax on £100 of extra profit, taken out as a dividend by a higher rate taxpayer, is about 53p in the pound (26.5p of Corporation Tax, and then 35.75% of the remaining £73.50). That is why pension contributions, which avoid both layers, are so attractive.
A common mistake is to extract every spare pound as a dividend. Money that stays in the company is taxed once, at Corporation Tax rates, and you can decide when to take it. If your family spending is £70,000 a year, you may not need to take £140,000. Leaving the rest in the company, perhaps to be invested or used for pension contributions, can be far more efficient. Our guide on whether to leave profits in your company covers this in depth.
Dividends must come from distributable profits, which means retained profits after tax. Each one needs a board minute and a dividend voucher. Overpaying without profits makes the payment an illegal dividend, which is treated as a director's loan, with the tax consequences that come with it. A director's loan that is still outstanding nine months and one day after the year end triggers a 35.75% charge for the company on loans made after 6 April 2026. This is refundable once the loan is repaid, but it ties up cash in the meantime. Our guide to directors' loan accounts explains how this works.
Dividends are taxed in the tax year in which they are paid, not the year in which they are earned. A planned schedule, perhaps quarterly, gives you flexibility. If you reach the end of the year and discover you are £5,000 above the £100,000 line, a smaller dividend, a pension contribution or a different split between spouses might fix it. If you have left it until the following April, it is too late.
Dividend tax is paid through Self Assessment, with the return and the balancing payment due on 31 January after the end of the tax year. For higher earners, the system also requires payments on account on 31 January and 31 July. A first-year director who takes a large dividend in March can face a bill of more than one year's tax in the following January. Set money aside every time you take a dividend. Our guide on Self Assessment for directors explains the deadlines.
Once you have used your pension, you may still have surplus cash, either in the company or personally. What you do with it depends on your goals, your appetite for risk and how long you can leave it invested. I am an accountant, not an investment adviser, so please take regulated advice before investing. But I can explain how the tax works.
Every adult can put up to £20,000 into ISAs in 2026–27. Growth and income within an ISA are free of tax, with no reporting on your return. Both you and your spouse have a separate allowance, which makes £40,000 between you. The allowance cannot be carried forward, so a missed year is lost. For directors with spare cash after tax, ISAs are simple, flexible and easy to understand.
If you sell investments outside an ISA or a pension, any gain is subject to Capital Gains Tax. From 6 April 2026 the rates are 18% for gains falling within the basic rate band and 24% above it, so a higher rate taxpayer usually pays 24%. The annual exempt amount is just £3,000. Spouses and civil partners can transfer assets between themselves without tax, which allows couples to use two exemptions and, in some cases, two sets of lower rates.
If you sell your company, or shares in it, you may qualify for Business Asset Disposal Relief. From 6 April 2026 the rate is 18% on qualifying gains, up to a lifetime limit that I understand remains £1 million. You normally need to own at least 5% of the shares and be an officer or employee, and to have done so for two years before the sale. If you are thinking of selling, you should talk to us as early as possible, because the structure and timing matter enormously.
Many directors ask whether the company should hold the investments. The answer is sometimes yes, and often no. Dividends received by a company from most UK and overseas shareholdings are generally exempt from Corporation Tax. But interest and gains are taxed at Corporation Tax rates, and the money is still inside the company. Taking it out later brings in dividend tax. More importantly, if the company's activities become mostly investment, rather than trading, it may lose valuable reliefs such as Business Asset Disposal Relief and Business Property Relief, and could be treated as an investment company for tax purposes. I advise clients to keep the trading company clean, and to hold significant investments personally, in a pension or, occasionally, in a separate holding company set up for the purpose.
For directors with a high tolerance for risk, the venture capital schemes offer income tax relief. The Enterprise Investment Scheme gives 30% income tax relief on up to £1 million a year, or £2 million where at least £1 million goes into knowledge-intensive companies. The Seed Enterprise Investment Scheme gives 50% relief on up to £200,000 a year. Venture Capital Trusts give relief of 20% from 6 April 2026, down from 30%, on up to £200,000 a year, if shares are held for at least five years.
These investments are high-risk and often illiquid. A tax relief is no use if you lose the money. I have had clients who regretted putting money into a start-up just to save tax, and others who did well. Never let the tax relief be the reason. Take regulated advice.
Finally, a word on estates. Shares in a trading company can qualify for Business Property Relief, which can remove the value from your estate for Inheritance Tax. From 6 April 2026, 100% relief applies to the first £2.5 million of qualifying business and agricultural property, with 50% relief above that. The allowance is transferable between spouses and civil partners. For most owner-managed businesses in Kent, that is a significant protection, but it depends on the company remaining a trading company. That is another reason not to let investments dominate the balance sheet.
I often say that tax planning is like painting a house. If you do it before winter, it is straightforward. If you leave it until the roof is leaking, it is expensive and stressful.
A personal pension contribution must be paid by 5 April to count for that tax year. For an employer contribution, the company's deduction depends on when it pays, so the payment should be made before the company's year end, and the company needs the cash to do it. ISA allowances reset on 6 April. The tax-year rules on dividends and spouses depend on what happens before 5 April. A company with a 31 March year end has a different calendar from a company with a 30 June year end. If you wait until the final week, many of these choices are gone.
A good plan involves forecasting your profits, working out your personal income for the year, checking the thresholds, deciding on your pension and dividend levels, and then keeping an eye on the numbers as the year unfolds. I recommend a review soon after the year starts, again around the half-way point and a final check at least six weeks before the year end. That final review is when we confirm the dividends, the pension payment and any bonus or spouse planning.
Look at what has changed in only the last year. Dividend tax rates rose by two percentage points in April 2026. VCT relief fell. The Business Property Relief allowance was changed. Pensions come into the Inheritance Tax net from April 2027. Payrolling of benefits becomes mandatory from the same month. And the Autumn Budget is due on 28 October 2026. If you are reading this after that date, check what it changed, because the Budget may alter some of the details I have described.
Done properly, planning also helps you make better decisions about the business. How much cash can you safely take out? Can you afford to hire? Is it better to pay down a loan, or to invest? Do you want to sell in five years? The tax is part of the answer, but only part.
Let me bring it together. A Sevenoaks IT contractor runs a limited company that makes £200,000 of profit before his own pay. He is married, with two young children, and his wife works part-time and earns about £8,000. He takes a salary of £12,570 and the rest as dividends.
Without planning: the company pays about £1,136 of employer National Insurance and £45,618 of Corporation Tax. He receives £140,676 of dividends and pays £47,481 in income tax, losing his entire Personal Allowance. His take-home pay is about £105,765, and the total tax is about £94,235. His adjusted net income is about £153,000, so the family also loses Tax-Free Childcare and the extended childcare hours.
With planning: the company pays £40,000 into his pension, using up part of his annual allowance and leaving a lot of room in the carry-forward. Corporation Tax falls to about £35,018, and his dividends fall to about £111,276, with income tax of about £35,668. His take-home pay is about £88,178, and the total tax falls to about £71,822.
He has £40,000 in his pension for a net cost to his family of about £17,587. His adjusted net income is still about £123,800, so the childcare help is still lost. A larger pension payment, using carried-forward allowance from earlier years, could bring him below £100,000, but that is a bigger commitment of company cash. His wife, who has unused allowances, could also own some of the shares and receive part of the dividends, taxed at 10.75% in her basic rate band, subject to the rules I described earlier.
These figures are simplified. They assume a single director, no associated companies, no other income and the rates for 2026–27. The real calculation involves the dividend timing, the pension carry-forward, the spouse's income and many other details. That is why a conversation is better than a rule of thumb.
Quick answer: The best tax planning for high-earning directors combines a salary at the Personal Allowance level, employer pension contributions, planned dividends, careful use of spouse allowances and ISAs, and early action before the thresholds at £100,000 and £125,140 apply. A company pension contribution is usually the most powerful single step.
What this means for a company director: You are allowed to arrange your affairs to pay the tax that is properly due, and no more. The tax rates between £100,000 and £125,140 are some of the highest in the system, so careful planning can save thousands of pounds a year. Start early, work out your income for the year in advance, and review it at least three times.
Example: A Sevenoaks contractor's company makes £200,000 before his pay. With no planning, he takes home about £105,765 and the total tax is about £94,235. If the company pays £40,000 into his pension, his take-home falls to about £88,178, a reduction of only £17,587, and the total tax falls by about £22,413.
Common mistakes: Taking every spare pound as a dividend. Missing the £100,000 threshold by a small amount. Putting money into a pension without checking the annual allowance. Making a spouse a shareholder without proper rights. Putting too many investments into the trading company. Leaving everything until March.
When should you speak to an accountant? When your income is heading above £100,000, when you want to make a large pension contribution, before you issue shares to a spouse, when you are thinking of selling the business, and at least six weeks before your company year end and the end of the tax year.
Dividends are simple, but they are the most heavily taxed way of extracting profit for a high earner. Salary at the allowance level, pension contributions and retaining profits all deserve a look.
These can turn a modest rise in income into a large bill, because family benefits are lost.
Shares given to a spouse who has no real rights, or where the money comes straight back to you, may be challenged. It must be a genuine gift.
Pension payments above your allowance, including the tapered allowance, create a tax charge. Check the carry-forward and the taper before you pay.
A trading company with a large investment portfolio can lose valuable reliefs on sale or on death. Keep them separate.
A venture capital scheme with a 30% income tax relief is no good if the company fails. Think about the investment first and the tax second.
By March, the choices have narrowed. By April, they have gone.
If you would like help planning your income, pensions, dividends and investments, we would love to talk. At Peter Hodgson & Co, we work with sole traders, contractors and company directors across Tunbridge Wells, Tonbridge, Sevenoaks, Maidstone and the rest of Kent and the South East. We can forecast your profits, model your options, and put together a plan you can follow throughout the year, so there are no nasty surprises in January.
To arrange a conversation, complete the "Contact Us" form on our website, call us on 01892 515 733, or email info@peterhodgson.co.uk. We would be glad to hear from you!
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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