How to Take Money Out of a Limited Company Tax-Efficiently (UK 2025)

Understanding Your Options: How Directors Can Extract Profits

As a company director, you have several ways to take money out of your company, each with different tax implications:

Main Methods:

• Salary (PAYE): Regular monthly payments through payroll
• Dividends: Distributions of company profits to shareholders
• Pension Contributions: Company contributions to your pension
• Directors' Loans: Borrowing money from the company (with strict rules)
• Expenses: Reimbursement of legitimate business expenses
• Benefits in Kind: Non-cash benefits (with tax implications)

Key Principle: The most tax-efficient approach usually combines a low salary with dividends, supplemented by pension contributions. Let's explore each method in detail.

1. Salary: The Foundation of Your Remuneration

Salary is the most straightforward way to pay yourself, but it's not always the most tax-efficient:

How Salary is Taxed:

• Income Tax: 20% on earnings between £12,571-£50,270, 40% on £50,271-£125,140, 45% above £125,140
• Employee National Insurance (NICs): 8% on earnings between £12,570-£50,270, 2% above £50,270
• Employer NICs: 13.8% on earnings above £9,100 (paid by company, reduces profit)
• Personal Allowance: First £12,570 is tax-free (2024/25)

Optimal Salary Levels:

• £9,100 (NIC Lower Earnings Limit):
  • Qualifies for state pension credits
  • No employee or employer NICs
  • No income tax (within personal allowance)
  • Best for: Maximizing tax efficiency when taking most profits as dividends
• £12,570 (Personal Allowance):
  • Maximum tax-free income
  • Triggers employee NICs above £12,570
  • Employer NICs apply above £9,100
  • Best for: When you want to use full personal allowance but minimize NICs
• Above £12,570:
  • Income tax and NICs apply
  • Usually less tax-efficient than dividends
  • Best for: When you need guaranteed income or for mortgage applications

Salary vs Dividends Comparison:

For most company directors, a combination works best. Use our Dividends vs Salary Calculator to find your optimal mix.

2. Dividends: The Tax-Efficient Profit Extraction Method

Dividends are distributions of company profits and are generally more tax-efficient than salary for higher earners:

How Dividends are Taxed:

• Dividend Allowance: First £500 is tax-free (2024/25) - reduced from £1,000 in previous years
• Basic Rate (8.75%): Dividends above £500, when total income (salary + dividends) is below £50,270
• Higher Rate (33.75%): Dividends when total income is between £50,271 and £125,140
• Additional Rate (39.35%): Dividends when total income exceeds £125,140
• No National Insurance: Dividends are not subject to NICs (major advantage over salary)

Key Advantages of Dividends:

• Lower Tax Rates: 8.75% vs 20% income tax + 8% NICs = 28% total on salary
• No Employer NICs: Company doesn't pay 13.8% employer NICs on dividends
• Flexibility: Can time dividend payments to optimize tax (e.g., across tax years)
• Control: You decide when to take dividends (subject to having sufficient profits)

Requirements for Paying Dividends:

• Company must have sufficient profits (retained earnings)
• Must hold a directors' meeting and minute the dividend decision
• Issue dividend vouchers to shareholders
• Record in company accounts
• Cannot pay dividends if company is insolvent

Example: Salary vs Dividends Tax Comparison

Scenario: Company profit of £60,000, director wants to extract £50,000

• Option 1 - All Salary:
  • Salary: £50,000
  • Income Tax: £7,486
  • Employee NICs: £2,994
  • Employer NICs: £5,652 (reduces company profit)
  • Total Tax: £16,132
  • Take-home: £39,520
• Option 2 - £12,570 Salary + £37,430 Dividends:
  • Salary: £12,570 (tax-free)
  • Dividends: £37,430
  • Dividend Tax: £3,229 (on £36,930 after £500 allowance)
  • Corporation Tax: £9,500 (on £47,430 profit after salary)
  • Total Tax: £12,729
  • Take-home: £37,771
• Savings: £3,403 per year by using salary + dividends mix

3. The Optimal Strategy: Salary + Dividends Combination

For most company directors, the best approach combines salary and dividends:

Recommended Structure:

• Salary: £9,100-£12,570 (depending on your circumstances)
• Remaining Profits: Dividends (after Corporation Tax)
• Additional: Pension Contributions (company contributions are tax-deductible)

Why This Works:

• Salary uses your personal allowance without triggering excessive NICs
• Dividends are taxed at lower rates and avoid NICs
• Company pays Corporation Tax (19-25%) before dividends, but overall tax is usually lower
• Flexibility to adjust dividend timing for tax planning

Calculating Your Optimal Mix:

Use our Dividends vs Salary Calculator to find the exact combination that minimizes your tax bill based on your profit level.

4. Pension Contributions: The Ultimate Tax-Efficient Extraction

Company pension contributions are one of the most tax-efficient ways to extract profits:

How Company Pension Contributions Work:

• Tax-Deductible: Company contributions reduce Corporation Tax (saving 19-25%)
• No NICs: Employer contributions don't attract National Insurance
• Tax Relief: You get tax relief on contributions (basic rate added automatically)
• Annual Allowance: Up to £60,000 per year (2024/25), or 100% of earnings if lower
• Carry Forward: Can use unused allowance from previous 3 years

Tax Benefits Example:

• Company Contribution: £10,000
• Corporation Tax Saving: £1,900-£2,500 (19-25%)
• No income tax or NICs on contribution
• Pension grows tax-free
• 25% can be taken tax-free at retirement
• Effective Cost: £7,500-£8,100 (depending on Corporation Tax rate)

When to Use Pension Contributions:

• You don't need the money immediately
• You want to reduce current tax liability
• You're planning for retirement
• You've already optimized salary and dividends
• You have unused pension allowance

5. Directors' Loans: Borrowing from Your Company

You can borrow money from your company, but there are strict rules and tax implications:

Rules for Directors' Loans:

• Must Be Repaid: Loans must be repaid within 9 months of company year-end
• Benefit in Kind: If loan exceeds £10,000, you may pay tax on benefit
• Section 455 Tax: If loan not repaid in time, company pays 33.75% tax (refundable when repaid)
• Interest: Company should charge interest at HMRC's official rate (currently 2.25%)
• Record Keeping: Must be properly documented in company accounts

When Directors' Loans Make Sense:

• Short-term cash flow needs
• Bridging between dividend payments
• Emergency expenses
• Important: Must be repaid promptly to avoid tax charges

Tax Implications:

• If loan exceeds £10,000 and not repaid within 9 months, company pays 33.75% tax
• Tax is refunded when loan is repaid
• Benefit in Kind may apply if interest not charged at official rate
• Best Practice: Avoid directors' loans if possible, or ensure prompt repayment

6. Expenses: Reclaiming Business Costs

Legitimate business expenses can be reimbursed tax-free:

Allowable Expenses:

• Travel and accommodation for business
• Office costs (rent, utilities, supplies)
• Equipment and software
• Professional fees (accountant, legal)
• Marketing and advertising
• Training and professional development
• Business insurance
• Phone and internet (business portion)

Tax Benefits:

• Expenses reduce company profit, saving Corporation Tax
• No personal tax on reimbursed expenses
• More tax-efficient than taking money and paying expenses personally

7. Benefits in Kind: Non-Cash Benefits

You can receive non-cash benefits, but most are taxable:

Common Benefits:

• Company Car: Taxable benefit based on list price and CO2 emissions
• Private Medical Insurance: Taxable benefit
• Mobile Phone: Usually tax-free if primarily for business
• Trivial Benefits: Up to £50 per benefit, £300 per year total - tax-free

Tax Implications:

• Most benefits are subject to income tax and NICs
• Company must report on P11D form
• Usually less tax-efficient than salary or dividends
• Best Practice: Minimize benefits in kind, focus on salary/dividends/pension

8. Tax Planning Strategies

Strategic timing and planning can further optimize your tax position:

Year-End Planning:

• Time dividend payments to fall in optimal tax year
• Consider spreading large dividends across tax years
• Make pension contributions before year-end to reduce Corporation Tax
• Ensure expenses are claimed in correct tax year

Income Threshold Management:

• Keep total income below £50,270 to stay in basic rate band
• Avoid the 60% tax trap (£100,000-£125,140 where personal allowance tapers)
• Use pension contributions to reduce taxable income
• Consider spouse shareholding for income splitting

Corporation Tax Optimization:

• Keep profits below £50,000 to benefit from 19% rate (if possible)
• Use pension contributions to reduce taxable profits
• Claim all allowable expenses
• Consider timing of large expenses

9. Common Mistakes to Avoid

• Taking Too Much Salary: Higher tax and NICs than dividends
• Not Using Personal Allowance: Missing out on tax-free income
• Paying Dividends Without Profits: Illegal and can trigger penalties
• Not Documenting Dividends: Must have proper minutes and vouchers
• Ignoring Employer NICs: Salary above £9,100 triggers 13.8% employer NICs
• Not Claiming Expenses: Missing legitimate deductions increases tax
• Forgetting Pension Contributions: Missing tax-efficient extraction method
• Directors' Loans Not Repaid: Triggers Section 455 tax charges

10. Practical Examples

Example 1: Low Profit Company (£30,000 profit)

• Salary: £12,570 (uses personal allowance)
• Remaining profit: £17,430
• Corporation Tax: £3,312 (19% on £17,430)
• Available for dividends: £14,118
• Dividend tax: £1,189 (8.75% on £13,618 after £500 allowance)
• Total take-home: £25,499

Example 2: Medium Profit Company (£80,000 profit)

• Salary: £9,100 (avoids NICs)
• Remaining profit: £70,900
• Corporation Tax: £13,471 (19% on £70,900)
• Available for dividends: £57,429
• Total income: £66,529
• Dividend tax: £5,040 (8.75% on £16,529 above basic rate + 33.75% on £40,900 in higher rate)
• Total take-home: £61,489

Example 3: High Profit Company (£150,000 profit)

• Salary: £9,100
• Pension: £20,000 (company contribution)
• Remaining profit: £120,900
• Corporation Tax: £22,971 (19% on £120,900)
• Available for dividends: £97,929
• Total income: £107,029
• Dividend tax: £19,123 (mix of basic and higher rates)
• Total take-home: £87,906 + £20,000 pension

11. Getting Professional Help

While you can manage basic profit extraction yourself, professional advice is valuable for:

• Complex tax situations
• Multiple shareholders
• High profit levels
• Pension planning
• Year-end tax planning
• Ensuring compliance with HMRC rules

12. Next Steps

Now that you understand profit extraction methods:

• Use our Dividends vs Salary Calculator to find your optimal mix
• Check our Company Structuring Guide for share structure advice
• Read our Company Setup Guide if you're just starting out
• Visit our FAQ page for more tax advice