Key Takeaways:

• The “Dead Zone”: Profits between £50,000 and £250,000 are effectively taxed at 26.5% due to the loss of marginal relief.
• The Dividend Reality: The tax-free Dividend Allowance remains just £500 for 2025/26.
• Sole Directors: Be careful with your salary. The Secondary Threshold (when Employer NI kicks in) is just £5,000 this year, meaning a “standard” £12,570 salary could trigger an unexpected tax bill if you can’t claim Employment Allowance.
• Electric Vehicles: The Benefit in Kind (BiK) rate for EVs rises to 3% in April, but the 100% First Year Allowance remains a massive corporation tax saver.
• Pensions: Company pension contributions remain the “gold standard” for profit extraction, saving up to 25% in Corporation Tax.

Introduction: The “Standard” Advice Has Changed

For years, the playbook for Worcester business owners was simple: pay yourself a salary up to the Personal Allowance (£12,570) and take the rest as dividends.

In 2026, that advice is no longer one-size-fits-all. We are now dealing with a Corporation Tax main rate of 25%, a Dividend Allowance of just £500, and shifting National Insurance (NI) thresholds.

If your company year-end is March 31st (or even if it isn’t), the decisions you make before April 5th will determine not just your personal tax bill, but your company’s Corporation Tax liability.

1. The “Dead Zone”: Why £1 of Profit Can Cost 26.5p

Many directors still believe Corporation Tax is a flat 19% or 25%. It isn’t.

• First £50,000 profit: Taxed at 19% (Small Profits Rate).
• Profit over £250,000: Taxed at 25% (Main Rate).

The Trap: If your profit falls between £50,000 and £250,000, you pay the main rate of 25% but get “Marginal Relief” to smooth the jump. Mathematically, this means every £1 of profit in this band is effectively taxed at 26.5%.

The Strategy: If your projected profit is £60,000, that extra £10,000 is being taxed heavily. Making a £10,000 employer pension contribution would wipe out that profit, saving you £2,650 in Corporation Tax immediately. It is one of the few guaranteed ways to get 26.5% instant tax relief.

2. The Salary Sweet Spot (The Sole Director Trap)

For the 2025/26 tax year, finding the right salary level is tricky.

The Multi-Director/Employee Company: If you have employees (or multiple directors) and are eligible for the Employment Allowance (which covers the first £10,500 of Employer NI), the optimal salary is usually £12,570.

• This uses up your personal allowance.
• It counts as a qualifying year for State Pension.
• You pay zero Employee NI.
• The Employment Allowance wipes out the Employer NI.

The Sole Director Company: If you are the only employee, you cannot claim the Employment Allowance. The Secondary Threshold (the point where the company starts paying 13.8% NI) is just £5,000 for 2025/26.

• If you pay yourself £12,570, your company will have to pay 13.8% NI on the difference between £5,000 and £12,570. That is approx £1,044 in tax.
• Many sole directors may now consider opting for a lower salary (between £5,000 and £9,100) to avoid this administrative headache and tax cost, topping up with more dividends instead.

3. Dividends: The £500 Reality

The days of the £5,000 or £2,000 dividend allowance are long gone. For 2025/26, you can only take £500 tax-free.

Everything above that is taxed at:

• 8.75% (Basic Rate)
• 33.75% (Higher Rate)
• 39.35% (Additional Rate)

From April 6 2026, the tax rates will be increased to 10.75% (Basic rate), 35.75% (Higher rate).

Action: Before April 5th, ensure you have used your spouse’s basic rate band if they are a shareholder. If you are a higher rate taxpayer paying 33.75%, but your spouse has unused basic rate band (paying 8.75%), shifting share ownership (which takes time) or declaring dividends differently (if you have different share classes) could save thousands.

4. Electric Vehicles: The Rate is Rising

If you have been eyeing a Tesla or Polestar through the company, the rules are shifting slightly. From April 6th, 2025, the Benefit in Kind (BiK) rate for fully electric cars rises from 2% to 3%.

Don’t Panic: Even at 3%, an EV is phenomenally tax-efficient compared to a diesel car (which can be 30%+).

• Corporation Tax Win: You can still claim a 100% First Year Allowance on the purchase price of a brand new EV until March 31st, 2026.
• Example: Buy a £50,000 electric car before your year-end, and you can deduct the full £50,000 from your taxable profit. If you are in the “Dead Zone” (26.5% tax), that saves you £13,250 in Corporation Tax.

5. The “Small” Wins: Trivial Benefits

Do not ignore the small allowances. They add up. Trivial Benefits: You can provide yourself (and staff) with gifts worth up to £50 each, tax-free.

• Directors have an annual cap of £300.
• Rule: It cannot be cash or a voucher that can be exchanged for cash. It must be a “gift” (e.g., a meal out, a hamper, flowers).

Annual Event (The “Christmas Party”): You have an allowance of £150 per head per year for an annual function. If you haven’t used it for a Christmas party, you can use it for a “Spring Dinner” before April 5th. It is tax-deductible for the company and tax-free for you.

6. The S455 Trap (Director’s Loans)

Finally, check your Director’s Loan Account (DLA). If you have taken more money out of the company than you have taken in salary/dividends, your DLA is “overdrawn.” If this isn’t repaid within 9 months of your year-end, the company pays a brutal 33.75% S455 tax on the outstanding balance.

The Pre-April Fix: Declare a dividend now (dated before March 31st/April 5th) to clear the overdrawn balance. It uses up your current year’s allowances and prevents the S455 charge.

FAQs

Q: Can I pay my spouse a salary to reduce profit? A: Yes, but it must be commercially justifiable. If they actually do administrative work, marketing, or bookkeeping, you can pay them a market rate salary. This extracts profit tax-efficiently (using their Personal Allowance). If they do nothing, HMRC can challenge it as “tax evasion.”

Q: Should I take dividends now or after April 6th? A: If you haven’t used your basic rate band (£50,270 total income) for this year, take them now. If you have already hit the higher rate threshold, delaying the dividend until April 6th might push the tax bill into the next tax year (payable Jan 2027), giving you a cashflow advantage.

Q: Is the £60,000 pension limit per person or per company? A: It is per person (Director). If you have two directors, the company can potentially contribute £60,000 for each of you (total £120k deduction), provided the “wholly and exclusively” rules are met (i.e., the remuneration package is reasonable for the work done).