5 reasons business owners may opt for a lower salary

Opting for a lower salary can seem counterintuitive. After all, why would you want to take home less money?

However, as a business owner, there are several scenarios where it may be more efficient to reduce your salary in favour of other forms of remuneration, or simply to help ensure you remain eligible for certain benefits.

Read on to discover five reasons why business owners might opt for a lower salary.

1. To reduce Income Tax and National Insurance exposure

Your salary is typically subject to Income Tax and both employee and employer National Insurance contributions (NICs).

This means that taking a large salary can create a significant tax burden for both you and your business, which is why many business owners choose to take a salary up to a certain threshold.

Employee and employer NICs are charged as a percentage of your salary, and the current Income Tax rates are:

Personal Allowance (0%) – up to £12,570
Basic rate (20%) – £12,571 to £50,270
Higher rate (40%) – £50,271 to £125,140
Additional rate (45%) – over £125,140

So, one reason you may opt for a lower salary is to keep more of your taxable salary below certain Income Tax thresholds.

You may then want to find a more efficient way to extract the additional business money into your personal wealth, such as paying yourself dividends or contributing to your pension.

Of course, the most appropriate approach for you will depend on factors such as your income requirements, business profits, and future plans. But it’s important to be aware of how your salary is affected by key thresholds, so you can ensure your remuneration strategy is as efficient as possible.

One key risk to note is that to be eligible for the full State Pension, you need to have made at least 35 years of qualifying NICs, so make sure to factor this in if you plan to reduce your contributions.

2. To make use of dividend payments

Paying yourself dividends can be far more tax-efficient than a salary when it comes to extracting profits from your company, for both you and the business.

Dividend Tax rates are considerably lower than Income Tax. In 2026/27, they are:

10.75% for basic-rate taxpayers
35.75% for higher-rate taxpayers
39.35% for additional-rate taxpayers

Dividends are also not subject to employer or employee NICs.

Due to their favourable tax treatment, it may be beneficial to develop a remuneration strategy that combines a lower salary with dividend payments.

However, it’s important to remember that the dividends you may rely on can only be paid if your business has made enough profit.

3. To preserve Tax-Free Childcare

If you have young children, keeping your taxable income below certain thresholds can help ensure you remain eligible for key benefits.

For example, if either you or your partner has an adjusted net income above £100,000, you lose your entitlement to Tax-Free Childcare. This can be worth a considerable amount each year, particularly if your children are still babies or nursery age.

Given the potential value of this support, you may want to manage your salary carefully to ensure you remain eligible.

This might mean you maintain the same total income but contribute everything over £100,000 into your pension or other salary sacrifice schemes.

A financial planner can help you determine the best approach based on your income, business, and family circumstances.

4. To avoid the 60% Income Tax trap

If you have a salary between £100,000 and £125,140, you can face an effective tax rate of 60%. This is because your Personal Allowance gradually tapers by £1 for every £2 of income you have above £100,000.

For example, if you have an annual income of £110,000, your Personal Allowance would reduce by £5,000. That £5,000 would then be subject to 40% tax, costing you £2,000. On top of this, you would pay 40% tax on the £10,000 above £100,000, amounting to £4,000.

So, you would pay a total of £6,000 Income Tax on the £10,000 above the threshold, which is where the effective 60% rate comes from.

The most common way of avoiding this tax trap is to contribute your salary over £100,000 to your pension. That way, you ensure your income remains efficient and you can enjoy the additional benefit of tax relief on your contribution.

If you have already exceeded your Annual Allowance or want to enjoy the extra income more immediately, you may want to explore other salary sacrifice options.

5. To maximise pension planning opportunities

Reducing your salary in favour of pension contributions can be an effective way to keep you below key thresholds, as discussed above. In addition, making pension contributions can also come with significant tax efficiencies for both you and your business.

Employer pension contributions are typically treated as an allowable business expense, provided they pass HMRC’s “wholly and exclusively” test. This means they can be deducted from your company’s profits before Corporation Tax is applied, unlike personal contributions made from your salary.

Moreover, while salaries are liable for employer NI, pension contributions are not. This means you can avoid NI altogether when paying into a pension instead of taking the payment as salary.

Additionally, the rules for employer pension contributions are not limited by your personal earnings when it comes to the Annual Allowance. This means your company can contribute up to £60,000 a year (or more using carry forward), even if your salary is lower.

Finally, reducing your salary could help preserve your full pension Annual Allowance if it keeps your threshold income (your taxable income after pension contributions and other deductions) below £200,000 or your adjusted income (which includes all pension contributions) below £260,000. Once you exceed these thresholds, your Annual Allowance tapers, reducing by £1 for every £2 your adjusted income exceeds £260,000, to a minimum of £10,000.

A financial planner can help you determine the best strategy for ensuring you make the most of your pension while also securing your short-term needs.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.