One of the most common questions we’re asked at A&C Chartered Accountants is:
“What’s the most tax-efficient way to take money out of my limited company?”
For directors and owners of small businesses, understanding how to extract profits from your company without paying more tax than necessary is essential. While the classic advice used to be “take a small salary and the rest as dividends”, the truth is – it’s no longer that simple.
Why is profit extraction more complicated now?
Due to changes in tax legislation and individual circumstances, there’s no longer a one-size-fits-all strategy. What works for one business owner may not work for another.
The most accurate answer we can give – without running the numbers – is:
It depends.
To work out the best approach, you’ll need to consider your company’s financial position and your personal tax situation.
Key Factors That Affect Profit Extraction Strategy
Here are the main things to think about when deciding how to take money out of your limited company:
1. Company Profit Levels and Corporation Tax
How much profit your company makes will determine its corporation tax rate. Higher profits may mean a higher tax rate, which affects how much you can take out and how best to structure it.
2. Number of Director/Shareholders
If you’re not the only person involved, your extraction strategy needs to account for others – and how dividends or salaries are shared between director/shareholders.
3. Distributable Reserves
You can only pay dividends from distributable profits – so checking your company’s retained earnings is essential.
4. Other Personal Income
Your personal tax band is affected by any other income you receive (e.g. rental income, part-time work, investments). This will influence how much you can take out without pushing yourself into a higher tax bracket.
5. Your Age
If you’re aged 66 or over, you no longer pay Employees’ National Insurance on salary – which can affect the optimal mix of salary and dividends.
6. Employment Allowance (EA)
Some companies can claim up to £10,500 per year to offset Employer’s National Insurance. But your company might not qualify, or the allowance might already be used by other employees’ wages.
7. National Minimum Wage and Living Wage Rules
If you’re taking a salary through PAYE, you may need to comply with National Minimum or Living Wage requirements, particularly if you have employment contracts in place.
How Much Should I Take Out of My Company?
It might be tempting to extract all available profits, but this could lead to a higher tax bill than necessary.
Instead, consider what you actually need for your personal expenses and leave the rest in the company if you don’t need it immediately. This can be more tax-efficient in the long term.
Some directors also choose to retain funds with a view to:
In these cases, profits may be subject to Capital Gains Tax (CGT) rather than income tax, and could qualify for Business Asset Disposal Relief (BADR) – formerly Entrepreneurs’ Relief – which offers a 14% tax rate on qualifying gains.
Typical Strategy: Salary + Dividends
Many small business owners still benefit from the classic method of:
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Taking a salary up to the personal allowance (£12,570)
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Topping up with dividends to meet living costs
This works well in many cases, but it’s not guaranteed to be the best option for everyone – especially if you’re applying for a mortgage, making pension contributions, or planning to sell the business soon.
Get Personalised Advice from A&C Chartered Accountants
At A&C Chartered Accountants, we work with hundreds of owner-managed businesses across the UK. We know how important it is to get this right.
Whether you’re a sole director or part of a larger shareholder group, our team can help you:
✅ Maximise tax efficiency
✅ Avoid unexpected liabilities
✅ Plan for the future with confidence
📞 Ready to optimise your profit extraction strategy?
Get in touch today to speak to one of our experienced advisors.