For owner-managed companies in the UK, one question comes up early: how do I take money out of the business, tax-efficiently and lawfully? There is no single answer. Salary, dividends, pensions, bonuses, benefits and director’s loans are each taxed differently and, used well, they work best in combination. Used carelessly, they can bring unexpected tax charges and HMRC scrutiny.
Scornik Gerstein LLP’s guide, A Comprehensive Guide to Profit Extraction from Your Company in the UK, covers each option. Here are the key points:
Salary
Salary is deductible for Corporation Tax, and pay at or above the £6,708 Lower Earnings Limit preserves a State Pension qualifying year. The cost is Income Tax, employee National Insurance and 15% employer National Insurance above £5,000. The Employment Allowance (up to £10,500) is generally unavailable where the director is the only employee. A modest salary combined with other methods is often the better route.
Dividends
Dividends carry no National Insurance. After the £500 allowance, they are taxed at 10.75%, 35.75% and 39.35% (basic, higher and additional rates). However, a company may only pay them from distributable profits (section 830 of the Companies Act 2006); cash in the bank is not enough. Unlawful dividends may have to be repaid, so keep proper accounts, board minutes and dividend vouchers.
Pension contributions
Employer contributions can reduce the company’s Corporation Tax bill and attract no National Insurance or immediate Income Tax. The annual allowance is £60,000, and unused allowance from the three previous tax years may be carried forward. The trade-off: funds are generally locked away until retirement.
Director’s loan accounts
Withdrawals that are not salary, dividends or expenses create an overdrawn loan account. If it is still outstanding nine months and one day after the end of the accounting period, the company pays a 33.75% section 455 charge (£13,500 on a £40,000 loan), which is only reclaimable once the loan is repaid or written off. Interest-free or low-interest loans above £10,000 can also create a taxable benefit based on HMRC’s 3.75% official rate. Review the account regularly, and remember that company money is not personal money.
Bonuses
Bonuses are deductible and flexible, but attract Income Tax plus employee and employer National Insurance. In the guide’s example, a £10,000 bonus to a higher-rate taxpayer costs the company £11,500 before Corporation Tax relief, while the director keeps about £5,800. An accrued bonus must be paid within nine months of the year-end to be deductible in that year. Income between £100,000 and £125,140 faces an effective marginal Income Tax rate of 60%, because the personal allowance is withdrawn.
Benefits in kind
Company-paid does not mean tax-free: most benefits create Income Tax for the individual and 15% Class 1A National Insurance for the company. On a £40,000 car, a fully electric vehicle (4%) gives a taxable benefit of £1,600, against £10,000 for an illustrative 25% petrol car. Structure matters too: a company-owned phone can be exempt, while reimbursing a personal contract usually is not. Payrolling of most benefits in kind, including company cars, fuel, vans and medical benefits, becomes mandatory from April 2027.
Planning the exit
Today’s decisions affect a future sale. A share sale is generally taxed as a capital gain in the owner’s hands; an asset sale can result in a double tax charge, first in the company and again on extraction. For qualifying disposals from 6 April 2026, the Business Asset Disposal Relief rate is 18% on up to £1 million of lifetime gains, provided the conditions (including a 5% shareholding and trading status) are met throughout the two years before the disposal. Tidy records and cleared loan accounts support value. For family succession, gifts of shares can trigger Capital Gains Tax unless holdover relief is available, and 100% Business Relief from Inheritance Tax is capped at a £2.5 million allowance.
The bottom line
The right strategy is usually a combination of methods, shaped by the company’s profits, the owner’s tax position and long-term goals, and reviewed as rules change. Tax and company law interact closely here, so take advice before acting.
Download the full guide: https://scornik.com/blog/profit-extraction-from-your-company-in-the-uk
This article is for general information only and does not constitute legal or tax advice. Tax rates, allowances and legislation may change, and specific professional advice should be obtained before implementing any arrangement.
Scornik Gerstein LLP is a UK-regulated firm of solicitors advising businesses and individuals operating in the UK.
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