Tax Planning for Directors: How to Extract Profits Efficiently in 2025/26

For owner-managed businesses across Rugby and Warwickshire, getting paid isn’t just about taking a salary—it’s about extracting profits tax-efficiently. With Corporation Tax changes, frozen thresholds, and evolving dividend rules, directors need to be smarter than ever about how they pay themselves.

At Redwood Accountants, we help local directors optimise their income while staying compliant. Here's your guide to extracting profits efficiently in the 2025/26 tax year.

1. Salary vs Dividends: What’s the Right Balance?

For most directors, a combination of low salary and dividends remains the most tax-efficient approach. Why?

• Salaries are tax-deductible for the company, reducing Corporation Tax
• Dividends are taxed at lower personal rates than salary income
• Paying a salary maintains National Insurance credits for state pension entitlement

Typical 2025/26 strategy:

• Pay a salary up to the Primary Threshold (£12,570 – still frozen)
• Top up with dividends up to the basic rate threshold (likely £50,270 total income)

Talk to us about whether you should operate above or below the National Insurance Secondary Threshold to reduce employer NIC.

2. Dividend Allowance Cuts: Plan Around Them

The tax-free Dividend Allowance is being cut again in 2025/26, likely to just £500 (from £1,000 in 2024/25). Every pound above this will be taxed at:

• 8.75% (basic rate)
• 33.75% (higher rate)
• 39.35% (additional rate)

Planning tip: If you have flexibility, consider accelerating dividend payments before April 2025 to use the higher allowance while it lasts.

3. Make the Most of Allowances and Reliefs

Your personal tax efficiency goes beyond salary vs dividend:

• Use your £1,000 Personal Savings Allowance (higher for basic rate taxpayers)
• Contribute to pensions — tax-deductible for the company, tax-efficient long-term
• Use your spouse’s tax allowance — especially if they’re a shareholder
• Claim director’s use of home allowance where applicable
• Consider tax-efficient benefits like electric company cars

4. Avoid Tripping Into Higher Tax Bands

One common mistake is forgetting how personal income affects:

• Child Benefit clawback (starts at £60k income)
• Loss of personal allowance (above £100k income)
• Student loan repayments
• Tapered pension annual allowance

We help clients monitor income thresholds throughout the year—not just at year-end.

5. Should You Leave Profit in the Company?

Not all profit needs to be extracted. Leaving money in the company can:

• Reduce personal tax exposure
• Fund future investments (e.g. buying commercial property)
• Support loan applications with stronger retained earnings

We’ll help you decide whether to draw now, later, or not at all.

Redwood Accountants: Your Local Profit Extraction Specialists

We work closely with company directors across Rugby and Warwickshire to:

✅ Design the most tax-efficient remuneration strategy
✅ Monitor thresholds and timing for dividends
✅ Ensure pension contributions are maximised
✅ Stay ahead of rule changes that affect directors

Final Thoughts

Tax planning for directors isn’t just about minimising tax—it’s about planning for financial freedom, stability, and long-term growth. The 2025/26 tax year brings fresh challenges, but with smart strategies, you can keep more of your profits.

📞 Contact Redwood Accountants today for a tailored profit extraction review.

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