Case Study: Income Strategy

Jane, aged 57, is the sole director and shareholder of ABC Ltd. ABC Ltd remunerate Jane by paying a gross salary of £12,500, all of which is within her personal allowance and not subject to tax. In addition, Jane pays a gross dividend of £67,500. From the gross income of £80,000 per annum, Jane is left with a personal tax liability of £12,412.50 (£2,000 at 0%, £35,500 at 7.5%, and £30,000 at 32.5%), leaving a net annual income of £67,587.50. In addition to the personal tax liability, ABC Limited would also have a corporation tax liability of £12,825 on the dividends paid.

When reviewing Jane’s overall financial position, we identify that she is saving £10,000 a year into a Stocks & Shares ISA. If Jane were to cease contributions to the ISA and reduce her net income by £10,000 net per annum, Jane could save £4,814 in income tax and divert the full £14,814 into a pension directly from ABC Ltd. This reduces Jane’s dividend draw from £67,500 to £52,686, and her combined business and personal tax liability from £25,237.50 to £17,608.29. Jane and ABC Limited have managed to save a combined £7,629.21 in tax, whilst still achieving the same net income relative to her expenditure.

As Jane is over 55, we also identify that she can take 25% of the £14,814 pension contribution immediately without being subject to tax. The £3,703.50 this will generate would allow her to reduce her gross dividend by a further £5,480, from £52,686 to £47,206. We then advise Jane to pay the £5,480 back into her pension in preparation for retirement and to save the corporation tax that would be due on this profit. By replacing this amount of dividend with the tax-free cash entitlement from her pension, Jane can reduce the combined personal and corporate tax liability further from £17,608.29 to £14,786.09. The table below summarises the before and after position for Jane.

Before After
Gross Income Source  
PAYE £12,500.00 £12,500.00
Dividends £67,500.00 £47,206.00
Pension Tax-Free Cash £3,703.50
Total £80,000.00 £63,409.50
Personal Tax Liability £12,412.50 £5,816.95
Corporate Tax Liability on Dividend £12,825.00 £8,969.14
Combined Tax Liability £25,237.50 £14,786.09
Savings Made (ISA & Pension) £10,000.00 £16,590.50


By reviewing her income strategy, Jane has been able to reduce her personal tax liability by £6,595.55, ABC Ltd’s corporate tax liability by £3,855.86 per annum and accrue additional wealth of £6,590.50 in the pension (the amount above the ISA contribution that would have been made).

The total benefit of the advice to Jane is £17,041.91 in the current tax year, without reducing income or business assets.


All calculations are based on 2020/21 tax year

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The information contained in this article is based on the opinion of Continuum and based on our understanding of current HMRC rules.

The Financial Conduct Authority does not regulate taxation advice.

Levels and basis of taxation are subject to change and depend upon your personal circumstances.

The value of investments can fall as well as rise and you may get back less than you invested.

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