Priya Design Ltd: extracting an extra £30,000
Priya, 52, is the sole director and 100% shareholder of Priya Design Ltd, a UK trading company with no associated companies. For the year to 31 March 2026 the company expects profits before her remuneration of £190,000. She currently takes a salary of £12,570 and dividends of £60,000, and she has £14,000 of UK rental profit. She has no other income, has made no pension contributions in the last four years and has no existing pension savings. She wants an additional £30,000 in cash (before employer taxes) for a house deposit in August 2026, and she expects to sell the company to a trade buyer in about five years. Her accountant has suggested an employer pension contribution of £40,000, but Priya says she 'cannot eat a pension'.
1. Compare the cash cost to the company and the cash in Priya's hand for each of the three extraction routes. Assume her dividend allowance is already used and ignore the personal savings allowance.
Read the worked answer
Baseline (no extra extraction) Income £86,570; PA £12,570 fully used against salary. Non-savings £14,000 at 20% = £2,800. Dividends: basic band remaining £23,700, so £500 allowance at 0%, £23,200 at 8.75% = £2,030, £36,300 at 33.75% = £12,251. Total tax £17,081. Company marginal CT rate at £190,000 profits is 26.5% (marginal relief; limits not divided).
Route A – extra dividend £30,000 Total income £116,570, so PA falls to £4,285. Tax on £112,285: non-savings £22,285 at 20% = £4,457; dividends £14,915 at 8.75% = £1,305 and £74,585 at 33.75% = £25,172. Total £30,934. Extra tax £13,853 → net £16,147. Company needs £30,000 of post-CT profit = £40,816 of pre-tax profit (30,000/0.735).
Route B – bonus £30,000 Employer NIC 15% above £5,000 = £4,500; pre-CT cost £34,500, or £25,358 after CT relief. Employee NIC 2% = £600. Extra income tax £16,374 (40% bands, PA taper of £8,285 and £23,200 of dividends pushed from 8.75% to 33.75%). Net £13,026.
Route C – employer pension £40,000 Deductible: net cost to the company £40,000 × 0.735 = £29,400. No income tax or NIC now; 25% tax-free cash at 57 and the rest taxed at her marginal rate on drawdown. No cash today.
Conclusion For a cash need, the dividend wins (£16,147 v £13,026) because the bonus pushes her existing dividends out of the basic band and triggers the taper. The pension is by far the most tax-efficient per £ of company profit but does not meet the objective; a hybrid (dividend for the deposit, pension for the rest) is usually the right answer.
2. How much can she take in 2025/26 before the personal allowance taper starts, and what does that imply for the timing of the £30,000? Quantify the saving.
Read the worked answer
Headroom = £100,000 − £86,570 = £13,430.
Above that, the marginal rate on a bonus is 40% + 20% (taper) + 2% NIC = 62%; on a dividend 33.75% + 20% = 53.75%.
Take £13,430 as an interim dividend before 5 April 2026 (it sits in the 8.75% band: £13,430 × 8.75% = £1,175) and the remaining £16,570 after 6 April 2026. In 2026/27, if her other income repeats, total income is £103,140, so PA falls by only £1,570; the extra tax is roughly £314 (lost PA) plus £1,893 (8.75% slice) plus £3,367 (33.75% on the balance) ≈ £5,574.
Two-year cost ≈ £6,749 against £13,853 for a single £30,000 dividend in one year - a saving of roughly £7,100. Points to police:
- A dividend must be properly declared (board minute, distributable profits); she cannot backdate one after 5 April.
- She needs the cash in August 2026, so the March tranche can simply be held.
- If the deposit slips, taking everything in 2026/27 costs the full 53.75% marginal rate on most of it.
- An employer pension contribution does not reduce adjusted net income, so it will not restore the personal allowance. Only a personal contribution would, and hers is capped at her £12,570 of relevant earnings.
3. She plans to sell the company in about five years. How should that change the analysis, and what non-tax factors matter?
Read the worked answer
- Valuation effect. A £40,000 employer contribution permanently reduces the company's profit and cash, which normally reduces the sale price. The CT saving is 26.5% (£10,600); the price reduction is taxed at her CGT rate with Business Asset Disposal Relief (14% in 2025/26, rising to 18% from 2026/27). On a capitalisation of, say, 4× profit, £40,000 of lost profit could cost far more in proceeds than the CT saved. Model this, do not assume the pension always wins.
- The 25% tax-free cash and drawdown. She is 52, so access at 57 is five years away - after the likely sale. The pension is the only route where the money leaves the company without income tax or NIC, so if part of the £30,000 is not needed in August, route it to pension.
- Annual allowance. £60,000 for 2025/26 plus carry forward from the previous three years (unused because she contributed nothing), so £40,000 is comfortably within scope. Document the remuneration rationale - a large one-off contribution for a director is within 'wholly and exclusively' if it is part of a package, but HMRC will look at it closely.
- Non-tax. She needs liquidity for the deposit; check the company's cash position and any bank covenants; a bonus reduces company cash by £34,500, a dividend by £30,000. Also consider whether the buyer will want her to stay on and how the pension interacts with any earn-out.