Tax planning is often seen as complex, but a few strategic adjustments can make an enormous difference to your bottom line.
If you are drawing £125,000 from your limited company in the traditional way, you could be paying thousands more in tax than necessary.
However, with some simple yet highly effective changes, you can reduce your personal tax bill, increase your take-home income, and even build wealth for the future.
Let’s break down exactly how this works.

(Read Time: Approx. 3 minutes)
Topics Discussed:
- How restructuring your income can reduce personal and corporate tax liabilities
- A simple strategy to increase your net income while securing long-term financial benefits
The Conventional (and Costly) Approach
Sarah, a business owner, takes £125,000 per year from her limited company. Her income is structured in the way that many people follow:
- Salary: £12,570 (utilising the personal tax-free allowance)
- Dividends: £112,430
- Personal vehicle lease: £12,000
- Motor expenses: £4,000
Under this structure, her personal tax liability is £34,057, leaving her with £74,943 in net income.
While this is a common method of drawing money from a business, it is far from the most tax-efficient approach.
A More Efficient Tax Strategy
By making a few simple adjustments, Sarah could significantly lower her tax burden and keep more money in her pocket.
Reduce Dividends
Instead of withdrawing £112,430 in dividends, she reduces this to £84,430.
While this might seem like a loss, it actually leads to a better financial outcome once other adjustments are made.
Put the Car Through the Company
Rather than paying £12,000 per year for a personal vehicle lease and £4,000 in personal motoring expenses, Sarah’s company purchases an electric vehicle and covers these costs directly.
This is a game changer. The tax treatment for electric company cars is far more favourable, with very low Benefit-in-Kind (BIK) tax rates compared to petrol or diesel vehicles.
This move shifts a personal expense into a company cost, which is far more tax efficient.
Make a Pension Contribution
Sarah arranges for her company to pay £25,000 directly into a personal pension.
This brings several key benefits:
- No income tax is paid on this amount.
- It reduces the corporation tax liability for her business.
- The pension fund will grow tax-free, allowing for long-term wealth accumulation.
The Financial Impact of This Strategy
By following this approach, Sarah’s new tax position looks like this:
- Salary: £12,570
- Dividends: £84,430
- Electric car & expenses (paid by the company): £16,000
- Pension contribution: £25,000
- New personal tax liability: £20,532
- Net income left: £76,668 (compared to £74,943 previously)
The Key Wins
- Significantly lower personal tax – down from £34,057 to £20,532
- Higher take-home pay – now £76,668, despite taking less in dividends
- £25,000 in a pension, growing at 7% per year, tax-free
- An extra £10,250 saved in corporation tax
This approach results in a lower personal tax bill, a higher net income, and long-term financial security through tax-efficient pension contributions.
Summary
Most business owners unknowingly overpay tax simply because they follow outdated or inefficient methods of drawing income. The good news is that small changes can lead to big savings.
By reducing dividends, using company benefits like electric cars, and making pension contributions, you can keep more of your hard-earned money while reducing your corporation tax and personal tax burden.
If you are currently drawing income from your limited company in the conventional way, it is worth reviewing whether you could be saving thousands of pounds per year with a more efficient structure.
Want to find out how much you could save?
If you are interested in restructuring your income to keep more of your money, get in touch.
A consultation with Ilyas Patel of Tax Expert could make all the difference.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel