Tax-efficient ways for business owners to pay themselves

As a business owner, how you pay yourself matters. Doing so without considering the tax implications could mean you miss opportunities to make your income more efficient. 

There isn’t a one-size-fits-all solution that will be suitable for every business owner. It will depend on your needs, long-term goals, and the structure of your business, which might also affect what’s appropriate. Seeking tailored financial advice could help you create a strategy that’s right for you. 

3 ways you could tax-efficiently withdraw money from your business

1. Taking an income

Perhaps the most straightforward option is to pay yourself a salary from the business. However, many business owners opt to take a relatively low income to manage their Income Tax liability.

For example, you might keep your income below £50,271 – the threshold for paying the higher rate of Income Tax in 2026/27 – to avoid being pushed into a higher tax bracket. 

As well as your Income Tax rate rising from 20% to 40% if you became a higher-rate taxpayer, you might lose other allowances.

For example, the Personal Savings Allowance, the amount you can earn in interest before you may be liable for Income Tax, is £1,000 for basic-rate taxpayers. For higher-rate taxpayers, it falls to £500. 

Similarly, your Personal Allowance (the amount you can earn without paying Income Tax) falls by £1 for every £2 of income above £100,000. This means the adjusted net income between £100,000 and £125,140 is effectively taxed at a rate of 60%. 

So, you might want to take a reduced salary from your business and supplement it with other sources. As you’ll be in control of your income, you could adjust it to improve your tax strategy. 

2. Receiving dividends 

A dividend is a portion of your company’s post-tax profits that is paid to shareholders. You may use dividends to tax-efficiently extract profits. 

In 2026/27, you can receive up to £500 in dividends before tax is due, thanks to the Dividend Allowance. The rate of tax you pay on dividends above the allowance will depend on your Income Tax band. In 2026/27, the Dividend Tax rates are:

• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35%

As the rates are lower than the Income Tax rates, using dividends rather than a salary to boost your income could be tax-efficient. 

You can declare dividends as often as required, assuming there are sufficient profits, which can be useful when managing your tax liability. 

3. Contributing to your pension 

The money held in your pension isn’t usually accessible until you turn 55 (rising to 57 in 2028), so this option won’t increase your income now. However, you could consider paying into your pension as a way of paying your future self, and there are tax benefits to doing so. 

First, your pension contributions would benefit from tax relief. This provides an instant boost to your retirement savings that has the potential to compound over the long term. 

Second, employer pension contributions are typically an allowable business expense, which could reduce your taxable profits when calculating Corporation Tax.

Consequently, contributing to your pension could provide you with financial security in retirement, while offering tax benefits to both you and your business now. 

Consider the tax efficiency of your exit strategy

While your focus might be on your current income, it’s never too soon to think about how you’ll exit your business and ways you might make it more tax-efficient. 

Typically, when you sell your business, you’ll be liable for Capital Gains Tax. If you choose to leave your business as an inheritance for someone, your estate could face an Inheritance Tax bill. Luckily, there are tax reliefs and allowances that could ease a potential bill. 

Speak to us for tailored advice

Whether you want to review your current income or start to plan for retirement, we could help. Please contact us to arrange a meeting. 

Please note:

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.