It usually starts the same way.
A director of an education business — a nursery owner, a private training provider, an online learning company, or an independent school — sits across the table from us and says something like:
“The business is doing okay… but I honestly don’t know if I’m paying myself the right way.”
They’re not new.
They’re not careless.
In education, directors often put learners, staff, and outcomes first — and themselves last. Pay decisions are made reactively, quietly, and often without proper planning.
At Accounting Matters, we see this every day. And over time, small pay decisions — made with good intentions — quietly turn into tax problems, cashflow pressure, and personal stress.
So let’s talk about it properly.
Education-sector limited companies are not like most other businesses.
Unfortunately, HMRC doesn’t see it that way.
And “doing what you did last year” is rarely the right answer.
In a limited company, directors generally extract money in one (or more) of the following ways:
- Salary
- Dividends
- Informal drawings (often accidentally)
The problem isn’t choosing one.
The problem is choosing without understanding the consequences.
Let’s walk through this the way we explain it to education-sector directors in real life.
Option 1: Salary — the safe but misunderstood route
Salary feels familiar. It’s predictable. It feels “proper”.
For many education directors — especially those who came from employment — salary feels like the responsible choice.
What salary does well
- It counts as earned income
- It builds your National Insurance record
- It reduces your company’s taxable profit
- It supports mortgage and credit applications
From a stability perspective, salary has real value.
Where education directors go wrong
We regularly see two extremes:
1. Paying too much salary
This often happens when directors want consistency but don’t realise:
- Employer’s National Insurance adds a real cost
- Salary is one of the most heavily taxed ways to extract profit
2. Paying no salary at all
This is common in early-stage education businesses or nurseries reinvesting heavily.
But over time, it can:
- Damage state pension entitlement
- Create personal tax inefficiencies
- Push directors into risky dividend-only strategies
Salary is not “bad” — but in isolation, it’s rarely optimal.
Option 2: Dividends — efficient, but only when handled properly
Dividends are often described as “tax efficient”, and technically, that’s true.
They:
- Are not subject to National Insurance
- Are taxed at lower rates than salary
- Offer flexibility in timing
This makes dividends attractive — especially for directors trying to keep costs down while reinvesting in staff, resources, or facilities.
The education-sector dividend trap
Here’s where we see problems arise.
Many education directors:
- Treat dividends like a monthly wage
- Take money when cash allows, not when profits exist
- Assume that “money in the bank” equals profit
But dividends can only be paid if:
- The company has sufficient retained profits
- Proper paperwork is completed
- The business can genuinely afford the extraction
In education businesses with:
- Uneven cashflow
- Term-based income
- Funding delays
…this is where mistakes quietly build.
“We didn’t realise that wasn’t allowed…”
This is one of the most common phrases we hear.
Directors don’t intentionally do the wrong thing. They simply:
- Prioritise staff wages
- Pay suppliers
- Take what’s left to live on
Over time, this creates:
- Illegal dividends
- Overdrawn director’s loan accounts
- Unexpected tax bills
- Stress at year-end
The problem isn’t dividends.
The problem is dividends without visibility.
Option 3: The unplanned drawings problem (the one no one talks about)
In many education-sector companies, directors don’t consciously choose salary or dividends.
They just… take money.
- A transfer here
- A personal bill paid there
- A short-term top-up during quieter months
This feels harmless. After all, you’re the director.
But this is how director’s loan account problems are born — and why so many education businesses are profitable on paper but struggling in reality.
(We’ll explore this fully in Blog 3.)
Why “dividends only” advice is especially risky in education
We often meet education directors who were told early on:
“Just take dividends — it’s cheaper.”
That advice ignores:
- Term-time cash fluctuations
- VAT timing issues
- Corporation Tax reserves
- Funding uncertainty
Education businesses need stability, not just efficiency.
A dividends-only approach often collapses under pressure when:
- Cash dips unexpectedly
- Tax bills land after busy periods
- Directors forget to reserve for personal tax
The balanced approach: salary and dividends together
For most education-sector limited company directors, the most sensible approach is a blend:
- A modest, tax-efficient salary
- Supported by planned dividends, not reactive ones
This gives:
- NI record protection
- Predictable personal income
- Controlled tax exposure
- Better cashflow management
Crucially, it removes panic from decision-making.
Why education directors need planning, not formulas
There is no universal “best salary”.
What works depends on:
- Total profits
- Funding reliability
- VAT position
- Other household income
- Long-term goals
Education businesses change quickly:
- New courses
- Increased staffing
- Premises expansion
- Regulatory requirements
Your pay strategy must change with it.
The mistakes we see every year in education companies
Some of the most common issues we fix:
- Directors paying themselves without understanding profits
- No separation between personal and business cash
- Ignoring Corporation Tax until it’s due
- Forgetting personal tax on dividends
- Using director drawings to “smooth” quiet months
These decisions don’t feel dramatic — until they compound.
How this links directly to cashflow stress
Director pay decisions are one of the biggest drivers of cash pressure in education businesses.
This is why many directors say:
“We’re profitable, but it never feels comfortable.”
This isn’t failure.
It’s lack of planning.
(We explore this fully in Blog 2: Why Your Education Business Can Be Profitable but Still Struggle for Cash.)
How Accounting Matters supports education-sector directors
We don’t believe in generic advice or copy-and-paste strategies.
Our role is to:
- Understand how your education business actually operates
- Align director pay with real cashflow, not assumptions
- Plan ahead so tax never comes as a shock
- Explain everything clearly, without jargon
We help education directors pay themselves confidently, not cautiously.
A final thought for education business owners
You didn’t build your education business to feel anxious about money.
Paying yourself properly isn’t selfish.
It’s responsible.
When director pay is planned:
- The business is stronger
- Cashflow is calmer
- Decisions are clearer
- Stress reduces — for you and your team
And most importantly, it allows you to focus on what you set out to do in the first place:
educate, support, and make an impact — sustainably.