The short answer: how to pay yourself when profits pass £150,000
Take a small salary, top up with dividends to the point where your personal income reaches £100,000, and put anything beyond that into a pension instead of drawing it. That order is not about being clever, it is about avoiding the one stretch of income that HMRC taxes hardest. Between £100,000 and £125,140 your personal allowance is stripped away as you earn, and the money in that band is taxed at an effective 60 percent, which is higher than the rate a millionaire pays on their top pound.
So the plan writes itself. Fill up the cheap and middling tax bands with salary and dividends, stop before the 60 percent band, and shelter the surplus somewhere it is not taxed now. For most owners that shelter is a company pension contribution, which is free of both corporation tax and personal tax going in. The monthly management accounts that tell you where your profit is actually landing are what make this a decision rather than a guess.
This guide is written by LOYALS, a King's Cross firm of accountants and business consultants that sets director pay, files the corporation tax and runs the annual tax planning review for owner managed companies across London, so what follows is the conversation we actually have with a client whose profit has crossed £150,000, not the textbook version.
Why income between £100,000 and £125,140 is taxed at 60 percent
Because your tax-free personal allowance is taken away in that band. Everyone gets a £12,570 personal allowance, but once your income goes over £100,000 it drops by £1 for every £2 you earn above that line, and it has gone completely by £125,140. The rates themselves are frozen for 2026 to 2027 at 20 percent to £50,270, 40 percent to £125,140 and 45 percent above, and gov.uk sets them out in full on its income tax rates and bands page.
Here is what the allowance withdrawal does to a single pound. Earn £1 more inside that band and you pay 40 pence of higher-rate tax on it. But that same pound also removes 50 pence of your allowance, and that 50 pence, which used to be tax-free, is now taxed at 40 percent too, costing another 20 pence. Add the two together and the pound has cost you 60 pence. Draw £25,140 across the whole band and roughly £15,000 of it never reaches you.
Dividends do not escape it either. A dividend taken in that band is charged at the 35.75 percent higher dividend rate rather than 40 percent, but it still triggers the same allowance withdrawal on your other income, so the real cost of drawing dividends through the taper is a good deal more than the headline rate suggests. Whichever way you take money out between £100,000 and £125,140, you are handing over well over half of it, which is why the whole plan is built around not going there unless you have to.
The salary, dividend and pension mix that works in 2026-27
The efficient mix has three parts, taken in order. Each one does a specific job, and the amounts follow from your profit and how much cash you actually need.
Salary at the National Insurance threshold
Set a salary of £12,570. That uses your full personal allowance, keeps you below the £12,570 employee National Insurance threshold, and stays deductible against corporation tax. The catch for a one-person company is employer National Insurance: the secondary threshold is only £5,000 for 2026 to 2027, so the company pays 15 percent on the £7,570 above it, about £1,136 a year, and a sole director cannot use the employment allowance to wipe it out because gov.uk's employment allowance eligibility rules exclude a company whose only employee is its director. If your company has a second employee on the payroll, it can claim the £10,500 allowance and that £1,136 disappears. Even without it, the corporation tax saved on the salary comfortably beats the employer NIC cost, so £12,570 stays the right number for most.
Dividends up to the £100,000 line
Top your income up with dividends, but stop at £100,000. The dividend allowance is now just £500, and from 6 April 2026 the dividend rates rose by two percentage points, so the ordinary rate is 10.75 percent and the higher rate is 35.75 percent, confirmed on gov.uk's tax on dividends page. Dividends are still an efficient way to take profit up to the higher-rate band, because they carry no National Insurance. What changed this year is the price of the top slice: taking dividends above £100,000 now means the 35.75 percent rate and the allowance taper working against you at the same time.
Pension for the surplus
Send whatever is left into a pension as an employer contribution. This is the part most owners underuse. A company pension contribution is deductible against corporation tax and lands in your pension with no personal tax at all, up to the annual allowance of £60,000 for 2026 to 2027 set out in gov.uk's annual allowance guidance. So instead of paying 60 pence in the pound to draw the surplus now, you move it into your own pension untouched. The trade is that you cannot get at it until 57, which is the real question behind the whole plan and one we come back to below.
What three pay mixes actually cost at £150,000 of profit
Take a company making £150,000 of profit before the owner is paid, with one director and shareholder and no other associated companies. Here are three honest ways to deal with it, side by side. The figures are illustrative and rounded, but the gap between them is real.
| Approach at £150,000 profit | Dividends drawn | Into pension | Total tax now | Effective rate now |
|---|---|---|---|---|
| Take it all now | Dividends drawn: £103,926 | Into pension: £0 | Total tax now: £64,890 | Effective rate now: 43.3% |
| Draw to £100k, pension the surplus | Dividends drawn: £87,430 | Into pension: £22,444 | Total tax now: £49,333 | Effective rate now: 32.9% |
| Cash-light, £60k pension | Dividends drawn: £500 | Into pension: £60,000 | Total tax now: £17,604 | Effective rate now: 11.7% |
The middle row is the one to look at, because it takes the same £100,000 into your pocket as most owners want and simply stops there. Against taking the lot, it saves about £15,557 in tax and puts £22,444 into your pension rather than losing part of it to the 60 percent band. You end up better off by exactly the tax you did not pay, and the business runs identically.
The bottom row shows how low the bill can go, but read it honestly. That 11.7 percent is only low because most of the £150,000 is either sitting in a pension or left inside the company, not because the tax has vanished. You have £13,070 of actual cash in hand for the year. It suits an owner with income elsewhere or a partner's earnings to live on, not someone who needs the money to pay the mortgage.
What changes when profit reaches £250,000
The pension runs out of room. At £150,000 you could pension the whole surplus and stay under the £60,000 annual allowance with plenty to spare. At £250,000 profit, keeping your personal income down at £100,000 would mean pushing roughly £122,000 into a pension in one year, which is about double the allowance, and contributions above your allowance are clawed back through an annual allowance charge that cancels the benefit.
So at this level the surplus has to go three ways instead of one. You can carry forward unused annual allowance from the previous three years, which for someone who has not been contributing can free up a large one-off pension payment. You can accept that some income lands in the taper and pay the price on that slice knowingly. Or you can leave the extra profit inside the company, taxed once as corporation tax and drawn later in a year when your income is lower, or taken as a capital gain on a future sale. Which of the three fits depends on your pension history and whether you need the cash, and it is worth modelling rather than guessing, because the numbers move quickly once carry-forward is in play. Owners at this level are also getting close to the point where an annual review of director pay pays for itself several times over.
What this means for you if you actually need the money now
If you need the cash this year, the pension route is off the table and the plan changes. There is no point sheltering money you have to spend, so you draw what you need and accept the tax that comes with it, taper and all. The honest position is that a pension is not a way of dodging tax, it is a way of deferring it: 25 percent of the pot can normally be taken tax-free later and the rest is taxed as income when you draw it, usually at a lower rate in retirement than the 60 percent you would pay now, but taxed all the same, and locked away until age 57 from 2028.
Profit left in the company is deferred too, not saved outright. It has borne corporation tax, but the personal tax waits until you take it out as a dividend or, on a sale or winding up, as a capital gain. So the real decision is never purely which option has the lowest rate on a chart. It is how much of your money you genuinely need in your hand this year, and how much can wait. Get that number right and the rest of the mix follows. That is the piece a calculator cannot settle for you, and the reason owner pay is worth reviewing every year rather than setting once and forgetting.