By Hammond & Co
Introduction
If you run a limited company in the utility sector, you probably didn’t start it because you enjoy tax legislation. You set it up to build predictable income from recurring commissions, scale your business, and retain more of what you earn.
One of the most important — and most misunderstood — decisions you’ll make as a director is how you pay yourself.
Get it right, and you can significantly reduce your overall tax bill, improve cash flow, and avoid unpleasant surprises. Get it wrong, and you could be paying far more tax than necessary or even face compliance issues with HMRC.
At Hammond & Co, we work closely with commission-based utility businesses, so this guide is written specifically for you — not generic, one-size-fits-all advice.
In this blog, we’ll cover:
- The difference between salary and dividends
- How each is taxed
- What typically works best for utility-based limited companies
- Common mistakes we regularly see
- A practical, compliant approach to director pay
Understanding the Basics
As a director of a limited company, you and the business are legally separate. This means you can’t simply take money out whenever you like — the method you use matters, both for tax and compliance.
There are two main ways directors extract money from their company:
- Salary – paid through PAYE like an employee wage
- Dividends – paid from company profits after tax
Most directors in utility-based businesses use a combination of both. The key is getting the balance right.
Option 1: Paying Yourself a Salary
What Is a Director’s Salary?
A director’s salary is processed through payroll and reported to HMRC under PAYE. It counts as an allowable business expense, reducing your company’s taxable profit and therefore its corporation tax bill.
Tax Treatment of Salary
Salary is:
- Subject to Income Tax
- Subject to National Insurance (employee and employer)
- Reported via payroll submissions (RTI)
While National Insurance is often viewed negatively, a carefully set director salary can actually be very tax-efficient.
Why Salary Still Matters
A modest, well-structured salary can:
- Protect your entitlement to the State Pension
- Make use of your personal allowance
- Reduce corporation tax
- Keep your director pay structured and compliant
For most utility business owners, the optimal salary is not zero — but it’s also rarely a full commercial wage.
Option 2: Paying Yourself Dividends
What Are Dividends?
Dividends are payments made to shareholders from profits that remain after corporation tax. Unlike salary, dividends:
- Are not a business expense
- Can only be paid if the company has sufficient retained profits
- Must be formally declared and documented
In utility-based companies, dividends are often funded from recurring commission income, making accurate planning essential.
Tax Treatment of Dividends
Dividends:
- Are taxed at lower rates than salary
- Do not attract National Insurance
- Are taxed personally, outside of payroll
However, dividends are not tax-free, and dividend tax rules change regularly. Relying on outdated advice can be costly.
Why Utility-Based Businesses Need Extra Care
Utility-selling limited companies often have:
- Monthly or quarterly commission income
- Income volatility due to clawbacks or incentive adjustments
- Relatively low overheads
- Strong cash flow but fluctuating profits
This combination makes director pay planning more critical, not less.
One of the most common issues we see at Hammond & Co is directors taking dividends based on bank balance rather than actual profits — which can lead to illegal dividends and future tax problems.
Common (and Costly) Mistakes We See
1. Taking Dividends Without Checking Profits
Cash in the bank does not equal profit. Legal dividends require:
- Accurate bookkeeping
- Up-to-date figures
- Consideration of corporation tax
2. Paying No Salary at All
Some directors avoid salary entirely, missing out on:
- National Insurance credits
- Corporation tax relief
- A structured and defensible pay strategy
3. Paying Too Much Salary
Others pay themselves a full salary, triggering unnecessary:
- Income Tax
- Employee NI
- Employer NI
This is particularly inefficient for commission-based utility businesses.
4. No Ongoing Planning
Director pay should not be reviewed once a year. In utility businesses, it should be aligned with:
- Commission statements
- VAT liabilities
- Corporation tax forecasts
What a Tax-Efficient Approach Often Looks Like
While every business is different, a common structure for utility-based limited companies includes:
- A low, tax-efficient director salary
- Regular dividends backed by up-to-date management accounts
- Ongoing reviews throughout the year
This approach allows directors to:
- Access funds tax-efficiently
- Avoid unexpected tax bills
- Remain fully compliant
None of this works without accurate, timely numbers.
Timing Matters More Than You Think
When you take money from your company is just as important as how you take it.
Utility commissions can:
- Be delayed
- Be adjusted
- Be clawed back
A dividend taken too early can leave you personally taxed on income that later disappears. Proper timing and forecasting are essential.
The Importance of Bookkeeping and Management Accounts
Effective director pay planning relies on good data. For utility businesses, this typically means:
- Regular bookkeeping
- Reconciliation of commission statements
- Clear separation between business and personal spending
- Periodic management accounts
Without this, director pay decisions become guesswork — and HMRC has little tolerance for guesswork.
What HMRC Expects
HMRC expects:
- Salaries to be processed correctly through payroll
- Dividends to be properly declared
- Dividend vouchers and board minutes to exist
- Personal tax returns to align with company records
Director pay errors are one of the most common triggers for HMRC enquiries.
Why Generic or DIY Advice Often Falls Short
Online forums and generic guidance rarely consider:
- Commission volatility
- VAT complications
- A director’s wider income
- Long-term tax planning
What works for one business can be completely wrong for another.
How Hammond & Co Supports Utility-Based Directors
At Hammond & Co, we specialise in working with limited companies in the utility sector. We help directors to:
- Structure salary and dividends tax-efficiently
- Ensure dividends are legal and fully supported
- Forecast and plan for tax liabilities
- Receive clear, jargon-free advice
Most importantly, we treat director pay as an ongoing strategy — not a once-a-year discussion.
Final Thoughts
Director pay isn’t just an administrative task — it’s a strategic decision.
For utility-based limited companies, getting the balance right between salary and dividends can:
- Reduce tax
- Improve cash flow
- Provide peace of mind
If you’re unsure whether your current approach is right, that’s usually a sign it’s time for a review.
Hammond & Co is here to help you get it right.