Running an owner-managed company is ultimately about turning ideas into profit and profit into personal reward, without leaking more than necessary to HMRC. Yet the way you pay yourself and fellow directors is as important as the amount you pay. Select the right mix of salary, dividends, pension contributions and practical perks and the business will book deductible costs while you keep more in your pocket. Choose badly and the same cash may be hit three times – corporation tax first, then PAYE or dividend tax, then national insurance.
That is why we treat remuneration as an engineering problem. Work from first principles, plug in the 2025/26 tax rules and design a system that converts expenditure into genuine benefits under corporation tax. This article sets out that system in plain English. We begin with the headline corporation tax rates, move through salary versus dividends, examine pensions and benefits in kind, then knit everything together with a real-world example. By the end you will have a framework you can copy – and a clear sense of when professional input will pay for itself.
Understanding benefits under corporation tax
Corporation tax continues at a split rate for 2025/26: 19% for profits up to £50,000 and 25% above £250,000, with marginal relief smoothing the curve between the two. Because the charge is calculated on profit after deductible expenses, every pound you can legitimately book as a cost is worth up to 25p.
Scale matters. HMRC’s latest bulletin shows corporation tax receipts reached £97.9bn in 2024/25, around 10% of all UK taxation. Over the same period, the Office for National Statistics recorded the average net rate of return for private non-financial companies at just 8.8%. With margins tight, trimming the tax line is the simplest way to protect cashflow.
Salary vs dividends: Getting the balance right
Salary meets two goals at once: it counts as a deductible business expense and it secures qualifying years for your state pension. The sweet spot for 2025/26 is a gross salary around £12,750. That is fractionally above the employee national insurance contribution (NIC) primary threshold of £12,570, so you build entitlement without triggering employee NIC. Employer NIC begins at £9,100, so the company will pay a modest £392, but it also saves up to £3,187 in corporation tax.
Dividends begin once that core salary is in place. Dividends are paid from profits after corporation tax and therefore do not reduce the company’s bill, but they are free of NIC and remain taxed more lightly than salary: 8.75% in the basic band, 33.75 % in the higher band and 39.35% in the additional band, with a £500 dividend allowance on top. A £20,000 net dividend therefore attracts just £1,650 personal tax, roughly half the combined PAYE and NIC that the same gross salary would generate.
We model the salary–dividend split for every client as year end approaches; real figures beat guesswork every time.
Pension contributions: Shelter profit, build wealth
Employer pension contributions tick every compliance box you can think of. They are:
- deductible against corporation tax
- free of employer and employee NIC
- Tax free for the director up to the annual allowance (£60,000 plus any unused allowance from the previous three years).
Paying £40,000 into your pension shaves up to £10,000 from the company’s corporation tax bill and moves the cash into a tax-sheltered pot where it compounds. Two caveats: the contribution must be physically paid before the year end, and it needs to be proportionate to overall profit to satisfy the “wholly and exclusively” rule – a point we review in every remuneration plan.
Benefits in kind: Tax-efficient rewards that stick
Certain fringe benefits create valuable benefits under corporation tax with either low or zero personal charges.
- Electric company cars: The benefit-in-kind rate on fully electric vehicles stays at 2% until April 2028. The company can also claim 100% first-year capital allowances on purchase.
- Mobile phones: One handset per employee, with airtime and data, is tax free and fully deductible.
- Trivial benefits: Vouchers, flowers or hospitality costing £50 or less per gift (capped at £300 a year for directors) fall outside tax and NIC altogether.
Purchasing these items personally would require taxed income; buying them through the company moves them above the line and trims profit before tax.
Compliance checklist and record-keeping
Good numbers fail if the paperwork is sloppy. We embed these controls in every cloud bookkeeping package.
- Board minutes: Authorise salary, dividends and pension contributions.
- Payroll filings: Submit Real Time Information on time, even for low salaries.
- Dividend vouchers: Confirm amount, date and share class.
- Benefits reporting: File P11D or use a PAYE settlement agreement where appropriate.
- Working papers: Provide evidence that remuneration levels are reasonable and meet the wholly and exclusively rule.
For a quick tour of what compliant documentation looks like, visit our bookkeeping page.
How we help
We begin with the data – forecast profit, personal cash needs, pension ambitions – and build remuneration from the ground up. Salary runs through our real-time payroll module; pension payments are automated; dividends are journaled once the final quarterly figures are in. You can log in to the Fairman Keable portal at any point to see the live tax position. Should profit shift unexpectedly mid-year, we simply rerun the model and adjust the mix. See our tax-planning service for full details. The first meeting is on us.
Pulling all the threads together
Choosing the right blend of salary, dividends, pensions and benefits in kind turns everyday spending into measurable benefits under corporation tax. Handled properly, that blend can more than halve the tax you and your company pay while keeping you squarely within HMRC rules. We believe in decisions driven by numbers, not guesswork, and we have the modelling tools to prove the outcome before you act.
If you would like us to crunch your own figures and show the potential saving, get in touch today – we will quantify your gain before you make a single change.