You’ve done the hard work. You’ve built your plumbing or heating business, you’re turning a profit, and now you want to actually take some of that money home. But here’s the thing — how you take that money out of your limited company can mean the difference between keeping thousands more each year or handing it straight to HMRC.
If you’re running a limited company and just paying yourself a flat salary every month, you’re almost certainly paying more tax than you need to. This isn’t a loophole. It isn’t dodgy. It’s the way the system is designed to work. You just need to understand the mechanics.
Let’s break it down.
Salary and Dividends: What’s the Difference?
What Salary Means for a Company Director
When you pay yourself a salary from your limited company, it works the same way as any employer paying a member of staff. Your company runs a PAYE scheme, deducts income tax and employee National Insurance from your pay, and sends it to HMRC. On top of that, your company also pays employer’s National Insurance — an additional cost that comes straight out of company funds.
Think of it like this: every pound you take as salary gets taxed twice. Once on the way out of the company (employer’s NI), and once when it lands in your pocket (income tax and employee NI). It adds up fast.
What Dividends Are
Dividends are a share of your company’s profits paid to you as a shareholder. They’re taxed differently from salary. There’s no National Insurance on dividends — not for you, and not for the company. The tax rates on dividends are also lower than the equivalent income tax rates.
The catch? You can only pay dividends from retained profits. That means your company needs to have genuinely made a profit after all expenses, salaries, and Corporation Tax. You can’t pay yourself dividends from an empty pot.
Why You Can’t Just Take Everything as Dividends
It would be nice if you could skip the salary altogether and take everything as dividends. But HMRC expects company directors who work in the business to pay themselves a reasonable salary. Taking zero salary raises red flags. More practically, paying yourself some salary means you build up qualifying years for your State Pension and maintain your National Insurance record. It also gives your company a Corporation Tax deduction on the salary cost.
The strategy isn’t all-or-nothing. It’s about finding the right balance.
The Optimal Salary and Dividend Strategy for 2025/26
The “Sweet Spot” Salary
For the 2025/26 tax year, most accountants who work with trades businesses recommend setting your director’s salary at £12,570 per year. Here’s why that number matters.
£12,570 is the personal allowance — the amount you can earn before paying any income tax. It’s also at the National Insurance Primary Threshold level, which means you won’t trigger significant employee NI contributions. You use up your tax-free allowance, you protect your State Pension entitlement, and you keep both income tax and NI to an absolute minimum.
Go much higher than this, and you start paying 20% income tax plus 8% employee NI on every extra pound of salary. That’s 28% gone before your company even accounts for its own employer’s NI bill on top.
Employer’s National Insurance: The Hidden Cost
This is the bit many plumbers and heating engineers overlook. When your company pays you a salary above the Secondary Threshold, it also owes 13.8% employer’s National Insurance. This doesn’t come out of your pay — it’s an additional cost to the company. So for every £1,000 of salary above the threshold, your company is actually spending £1,138 to put £1,000 in your hands (before your own tax and NI deductions).
Keeping salary low doesn’t just save you tax personally. It saves your company money too.
Then Take the Rest as Dividends
Once you’ve set your salary at the sweet spot, you take additional income as dividends. Here’s where the savings really show up.
For 2025/26, dividend tax rates are:
- 0% on the first £500 of dividends (the dividend allowance)
- 8.75% on dividends within the basic rate band
- 33.75% on dividends within the higher rate band
- 39.35% on dividends above £125,140 (the additional rate)
Compare that to the combined income tax and NI you’d pay on salary above your personal allowance: 20% income tax + 8% employee NI = 28%. And that’s before your company pays 13.8% employer’s NI on top.
The difference between 8.75% dividend tax and an effective 28%+ salary deduction is enormous when you multiply it across a full year’s earnings.
Worked Examples: The Numbers That Matter
Let’s run through three realistic profit levels. These are the kinds of figures we see regularly from plumbing and heating businesses in Sheffield and across the UK. In each case, we’ll compare the “smart” approach (low salary plus dividends) against taking everything as salary.
Example 1: £40,000 Company Profit
This is a typical figure for a plumber or gas engineer in their first couple of years as a limited company, or someone working steadily without chasing big commercial jobs.
| Item | Salary + Dividends | All Salary |
|---|---|---|
| Gross salary | £12,570 | £40,000 |
| Employer’s NI (13.8% above threshold) | £0 | £3,785 |
| Corporation Tax (25% on remaining profit) | £6,858 | £0 |
| Dividends taken | £20,572 | £0 |
| Income tax on salary | £0 | £5,486 |
| Employee NI on salary | £0 | £2,194 |
| Dividend tax (8.75%, after £500 allowance) | £1,756 | £0 |
| Total tax & NI paid (personal + company) | £8,614 | £11,465 |
| Annual saving with salary + dividends | £2,851 | |
That’s nearly £3,000 more in your pocket each year. For doing exactly the same work, taking home the same lifestyle, but structuring your pay properly. That’s a holiday. That’s a new set of tools. That’s money working for you instead of HMRC.
Example 2: £60,000 Company Profit
This is where many established plumbing and heating businesses sit — maybe you’ve got a van on the road, a steady stream of contracts, and things are ticking along nicely. If you’re looking at the bigger picture of how your company is set up, our guide on sole trader vs limited company explains why structure matters.
| Item | Salary + Dividends | All Salary |
|---|---|---|
| Gross salary | £12,570 | £60,000 |
| Employer’s NI (13.8% above threshold) | £0 | £6,546 |
| Corporation Tax (25% on remaining profit) | £11,858 | £0 |
| Dividends taken | £35,572 | £0 |
| Income tax on salary | £0 | £11,486 |
| Employee NI on salary | £0 | £3,794 |
| Dividend tax (8.75%, after £500 allowance) | £3,069 | £0 |
| Total tax & NI paid (personal + company) | £14,927 | £21,826 |
| Annual saving with salary + dividends | £6,899 | |
Almost £7,000 saved. The dividend route keeps more of your income taxed at the basic rate, because dividends don’t attract NI. The all-salary route pushes you into higher combined deductions much sooner. At this profit level, the salary-plus-dividends approach is not optional — it’s essential.
Example 3: £80,000 Company Profit
If your plumbing or heating business is generating £80,000 in profit, you’re doing well. But this is also where you need to start thinking more carefully about the higher rate threshold (£50,270 of taxable income for 2025/26). Push too much through, and you’ll start paying 33.75% dividend tax instead of 8.75%.
| Item | Salary + Dividends | All Salary |
|---|---|---|
| Gross salary | £12,570 | £80,000 |
| Employer’s NI (13.8% above threshold) | £0 | £9,307 |
| Corporation Tax (25% on remaining profit) | £16,858 | £0 |
| Dividends taken | £50,572 | £0 |
| Income tax on salary | £0 | £19,432 |
| Employee NI on salary | £0 | £4,194 |
| Dividend tax (8.75% basic / 33.75% higher) | £5,753 | £0 |
| Total tax & NI paid (personal + company) | £22,611 | £32,933 |
| Annual saving with salary + dividends | £10,322 | |
Over £10,000 saved annually. At this level, you should also be thinking about pension contributions as a way to bring your taxable income back below the higher rate threshold. We’ll get to that shortly.
Pension Contributions: The Third Lever
Most plumbers and heating engineers know about salary. Most know about dividends. But the third piece of the puzzle is often overlooked: employer pension contributions.
Your company can pay money directly into your personal pension. When it does, here’s what happens:
- The contribution is a tax-deductible business expense, reducing your Corporation Tax bill
- There’s no National Insurance to pay — not employer’s NI, not employee NI
- There’s no income tax on the contribution when it goes in
- The money grows tax-free inside the pension until you draw it (and even then, 25% comes out tax-free)
Consider this: if your company has £10,000 of profit sitting above the higher rate threshold, you could take it as dividends and pay 33.75% tax on it. Or your company could put it into your pension and pay 0% tax right now. The trade-off is that pension money is locked away until you’re 57 (rising to 58 from 2028), but for long-term wealth building, it’s hard to beat.
For plumbers and heating engineers at the £80,000+ profit level, a combination of salary, dividends, and pension contributions is usually the most tax-efficient approach. The exact split depends on your personal circumstances, which is exactly the kind of thing we work through with our clients.
The Rules: What You Can and Can’t Do
Dividends Must Come From Profits
You can only declare dividends when your company has sufficient retained profits after all expenses and Corporation Tax. If your company made £30,000 profit but you’ve already taken £25,000 in dividends earlier in the year, you can only take another £5,000 (minus the Corporation Tax owed). Taking more than the company has earned as profit creates what’s called an illegal dividend — and HMRC takes a dim view of it.
You Need Proper Paperwork
Every dividend payment should be backed by:
- Board minutes recording the decision to declare a dividend
- A dividend voucher for each payment, showing the date, amount, and shareholder details
This isn’t optional paperwork. If HMRC ever enquires into your company, they’ll want to see these. Your accountant should be producing these for you. If they’re not, ask why.
Timing Is Flexible
Unlike salary, you don’t have to take dividends on a regular monthly schedule. You can declare dividends quarterly, twice a year, or as a single lump sum. Some plumbers and heating engineers prefer to take smaller monthly dividends and then a larger “top-up” once they know the full year’s profit figure. Others wait until year end and take a single larger dividend. Both approaches work — it comes down to how you manage your personal cash flow.
Keep Enough in the Company
Don’t strip every penny out as dividends. You need to keep enough in the business to cover your upcoming Corporation Tax bill, any VAT liability (our guide to VAT for plumbing businesses covers this in detail), and a working capital buffer for quieter months. Leaving the company bank account empty is a quick way to create cash flow problems that cost you more in the long run.
Common Mistakes That Cost You Money
1. Taking More Dividends Than the Company Has Earned
We see this regularly. A plumber has a great first half of the year, starts drawing dividends based on projected profits, then has a quieter second half. By year end, the dividends paid exceed the actual retained profit. These are illegal dividends, and sorting them out is messy. Either you repay the excess to the company, or it gets reclassified as salary — with full tax and NI to pay, plus potential penalties.
2. Not Setting Aside Money for Tax Bills
Just because the money is sitting in your business bank account doesn’t mean it’s yours to take. A good rule of thumb: ring-fence 25% of profit for Corporation Tax and keep your VAT money separate. Open a second business account if you have to. When January rolls around and you’ve got a Self Assessment bill to pay plus a Corporation Tax instalment due, you’ll be glad you planned ahead.
3. Forgetting to Declare Dividends on Your Self Assessment
Dividends are taxable income. They need to go on your personal Self Assessment tax return. HMRC knows what your company has filed, and they can cross-reference. Getting a nudge letter from HMRC about undeclared dividend income is not a conversation you want to have. Our year-end planning guide walks through how to make sure nothing gets missed.
4. Using Last Year’s Strategy Without Checking
Tax thresholds, NI rates, dividend allowances, and Corporation Tax rates change. The £500 dividend allowance for 2025/26 is half of what it was just two years ago (it was £1,000 in 2023/24 and £2,000 before that). What worked perfectly last year might not be optimal this year. Your extraction strategy needs reviewing every single April.
5. Not Considering Your Spouse
If your spouse or partner is a shareholder in your company, you can pay dividends to them too — using their own personal allowance and dividend allowance. This can be a legitimate way to reduce the overall household tax bill. But it needs to be set up correctly from the start, with genuine shareholdings and proper documentation. This is something to discuss with your accountant before acting on.
Not Sure You’re Extracting Profits the Right Way?
The difference between a properly planned salary-and-dividend strategy and just winging it can easily be £5,000 to £10,000 per year. That’s not a rounding error. That’s real money that could be going into your pension, your family, or back into growing your business.
Every plumbing and heating business is different. Your profit level, your family circumstances, your growth plans, and your pension position all affect the optimal split. There’s no one-size-fits-all answer, but there is almost always a better answer than the one you’re using now.
Book a free consultation and we’ll run the numbers for your specific situation — no jargon, no obligation. Just a clear picture of how much you could be saving, and exactly what to do about it.