If you run a limited company and suspect you are paying more tax than you need to, you are probably right. This guide explains the legal strategies available to director-owners, what commonly goes wrong, and where to start.

Why tax planning matters for your limited company

Running a limited company gives you access to tax-efficient structures that sole traders simply do not have. But those structures only save you money if someone is actively using them. Most director-owners reach their second or third year of trading before realising their accountant has been filing the numbers rather than questioning them.

Corporation tax receipts continue to rise year-on-year, and HMRC collected an additional £16 billion from UK businesses in 2024-25. A meaningful portion of that comes from small companies whose directors simply did not know what was available to them. Tax planning is not about finding loopholes. It is about using the rules that already exist in your favour, before the year-end.

Where most director-owners go wrong

The mistakes are rarely dramatic. They are usually quiet and cumulative. A suboptimal salary and dividend split held year after year. Pension contributions never set up. Expenses claimed inconsistently. These are not crises, but over three or four years they add up to a material amount of unnecessary tax.

Getting the salary and dividend split wrong

Most directors know roughly that taking a low salary and drawing dividends is more tax-efficient than paying themselves a high salary. Fewer know exactly where the optimal salary sits in relation to the personal allowance, National Insurance thresholds, and the company’s corporation tax deduction. The numbers shift slightly each tax year, and what was right in 2022 may not be right now.

Director’s loan accounts left unmanaged

Director’s loan accounts are one of the most common sources of tax problems for UK limited company owners. Drawing money from the company without declaring it as salary or dividend creates a loan from the company to you. If that loan is not repaid or formally written off within nine months of the company’s year-end, HMRC charges a 33.75% S455 tax on the outstanding balance. Many directors discover this only when they get their accounts.

What to do, step by step

Effective tax planning for a limited company is not a one-off exercise done at year-end. It is a set of decisions made throughout the year, ideally with your accountant involved before the transactions happen rather than after. Here is a practical order to work through.

1. Step 1: Set the right salary level for the current tax year. The most common approach is to pay a salary at or just above the Secondary National Insurance threshold (currently £5,000 for 2025-26) so the company qualifies for Employment Allowance where applicable, while keeping the director’s personal income tax exposure low. Check this figure at the start of each tax year, not at the end.
2. Step 2: Review your allowable expenses and make sure they are being captured consistently. This includes business mileage, home office costs, professional subscriptions, training directly relevant to your trade, and equipment. Many directors under-claim simply because no one has sat down with them and gone through the list. Missed expenses mean a higher taxable profit and a higher corporation tax bill.
3. Step 3: Consider employer pension contributions made directly from the company. Contributions paid by the company into your pension are an allowable business expense, reducing your corporation tax liability. They do not attract National Insurance. This is one of the most straightforward and HMRC-compliant ways to extract value from a limited company tax-efficiently, and it is underused by a large number of small company directors.

None of these steps require aggressive or complex arrangements. HMRC has been actively clamping down on promoted tax avoidance schemes since 2025, and the current regulatory direction strongly favours a conservative, compliant approach to tax planning. The good news is that the legal options available to small limited companies are genuinely useful without needing anything complicated.

Costs and what to expect

Whether you handle tax planning yourself or work with an accountant, there are trade-offs in both directions. DIY tax planning using HMRC guidance and online tools is possible, but the rules around directors’ remuneration, pension contributions, and benefit-in-kind calculations are specific enough that small errors can create larger problems. The cost of getting it right is usually less than the cost of getting it wrong.

How to get started today

You do not need to overhaul everything at once. The most productive first step is simply to know where you currently stand. Pull together your last set of company accounts, your current salary level, and a rough figure for what you have drawn in dividends this year. That is enough to have a useful first conversation.

• Check your current director’s salary against the 2025-26 National Insurance thresholds and confirm whether your company qualifies for Employment Allowance – this affects the optimal salary level.
• List every regular business expense and check whether it is being recorded and claimed consistently – mileage, home office, subscriptions, and equipment are the most frequently under-claimed categories for small limited companies.