If you run a limited company selling utilities, chances are you didn’t set it up because you love tax jargon. You set it up to build a sustainable income, benefit from recurring commissions, and create something scalable.
One of the most important (and most misunderstood) decisions you’ll make as a director is how to pay yourself. Get it right, and you can significantly reduce your tax bill while improving cash flow. Get it wrong, and you could be paying far more tax than necessary — or facing an unexpected bill later down the line.
As a director of a limited company, you’re separate from the business itself. That means you don’t just take money whenever you feel like it — how you extract money matters.
- Salary – paid through PAYE like a normal wage
- Dividends – paid from company profits after tax
Most directors in utility businesses use a combination of both, but the balance is where the planning comes in.
Option 1: Paying Yourself a Salary
What Is a Director’s Salary?
A director’s salary is paid through the company payroll and reported to HMRC under PAYE. It is treated as an allowable business expense, which means it reduces the company’s profit and therefore its corporation tax bill.
Tax Treatment of Salary
- Subject to Income Tax
- Subject to National Insurance (both employee and employer)
- Requires payroll submissions (RTI) to HMRC
For many directors, the idea of paying National Insurance doesn’t sound appealing — but a small, well-pitched salary can actually be very tax efficient.
Why Salary Still Matters
A low director salary can:
- Preserve your entitlement to the State Pension
- Use up your personal allowance
- Reduce corporation tax
- Keep you compliant and structured
For most directors, the optimal salary is not zero, but it’s also not a full commercial wage.
Option 2: Paying Yourself Dividends
What Are Dividends?
Dividends are payments made to shareholders from post-tax profits. Unlike salary, dividends:
- Are not a business expense
- Can only be paid if the company has sufficient retained profits
- Must be properly declared and documented
In utility-based businesses, dividends are often funded from recurring commission income, which makes planning especially important.
Tax Treatment of Dividends
Dividends:
- Are taxed at lower rates than salary
- Do not attract National Insurance
- Are taxed personally, not through payroll
However, dividends are not tax-free, and the rules change frequently — meaning assumptions based on old advice can be costly.
Why Utility-Based Businesses Are Different
Utility-selling limited companies often have:
- Monthly or quarterly commission payments
- Variable income due to clawbacks or incentives
- Relatively low overheads
- Strong cash flow but fluctuating profits
This combination makes director pay planning more important, not less.
We often see directors drawing dividends based on bank balance rather than profits — which can lead to illegal dividends and future tax problems.
The Common (and Costly) Mistakes
Here are the most frequent issues we see in utility-focused limited companies:
1. Taking Dividends Without Checking Profits
Cash in the bank does not automatically mean profit. Dividends must be supported by:
- Accurate bookkeeping
- Up-to-date management figures
- Consideration of corporation tax
2. No Salary at All
Some directors avoid salary entirely, missing out on:
- NI credits
- Corporation tax relief
- A structured approach to pay
3. Too Much Salary
Others pay themselves a full salary, triggering unnecessary:
- Income tax
- Employee NI
- Employer NI
This is particularly inefficient for commission-based businesses.
4. No Forward Planning
Director pay shouldn’t be decided once a year. In utility businesses, it should be reviewed regularly alongside:
- Commission statements
- VAT liabilities
- Corporation tax projections
What a Tax-Efficient Approach Often Looks Like
While every business is different, a common approach for utility-based limited companies is:
- A low, tax-efficient salary set at an optimal threshold
- Regular dividend payments supported by management accounts
- Ongoing reviews throughout the year
This allows directors to:
- Access money tax-efficiently
- Avoid surprises
- Stay compliant
Crucially, this approach only works if the numbers are kept up to date.
Timing Matters More Than You Think
When you take money out of your company is just as important as how.
Utility commissions can:
- Be paid late
- Be adjusted
- Be clawed back
This means dividend planning must consider not just current profits, but future risk.
A dividend taken too early can create personal tax liabilities even if profits later disappear.
The Role of Bookkeeping and Management Accounts
Good director pay planning relies on good data.
For utility businesses, this usually means:
- Regular bookkeeping
- Reconciliation of commission statements
- Clear separation of business and personal spending
- Periodic management accounts
Without this, director pay decisions are guesswork — and HMRC does not look kindly on guesswork.
What HMRC Expects
HMRC expects:
- Salary to be processed correctly through payroll
- Dividends to be properly declared
- Dividend vouchers and board minutes to exist
- Personal tax returns to match company records
Mistakes in director pay are one of the most common triggers for HMRC queries.
Why “DIY” Advice Often Fails
Online forums and generic advice rarely take into account:
- Commission volatility
- VAT complications
- Director’s wider income
- Long-term planning
What worked for someone else may be completely wrong for your business.
How We Help Utility-Based Directors
We work with limited companies in the utility sector to:
- Structure director pay tax-efficiently
- Ensure dividends are legal and supported
- Forecast tax liabilities
- Provide clear, jargon-free advice
Most importantly, we build this into an ongoing relationship, not a once-a-year conversation.
Final Thoughts
Director pay is not just an admin task — it’s a strategic decision.
For limited companies selling utilities, the right balance of 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 worth reviewing.