How to take money out of your limited company tax-efficiently

Understanding Your Options

As a director and shareholder of a limited company, you generally have two primary ways to extract money from your business: as a salary or as dividends. Each method has different tax consequences for both you and your company, making a combined approach often the most tax-efficient.

Salary: The PAYE Route

Paying yourself a salary means your company operates a Pay As You Earn (PAYE) scheme. This involves deducting Income Tax and National Insurance Contributions (NICs) at source.

Key points about taking a salary:

• Tax Deductible: Your company can deduct your salary as a business expense, reducing its taxable profits and therefore its Corporation Tax (CT) bill.
• National Insurance: Both you (as an employee) and your company (as an employer) pay NICs on salaries above certain thresholds.
• Employee NICs (Class 1 Primary): For the 2026/27 tax year, you pay 8% on earnings between the Primary Threshold of £12,570 and the Upper Earnings Limit of £50,270. Earnings above £50,270 are taxed at 2%.
• Employer NICs (Class 1 Secondary): Your company pays 15% on earnings above the Secondary Threshold, which is approximately £5,000 per year for 2026/27.
• Employment Allowance: Eligible companies can claim Employment Allowance, which reduces their annual employer NICs bill by up to £10,500 for 2026/27. This can significantly offset the cost of employer NICs, especially for smaller salaries.
• Personal Allowance: For 2026/27, the standard Personal Allowance is £12,570, meaning you don't pay Income Tax on earnings up to this amount.

Many directors opt for a "small salary" up to the Personal Allowance or the National Insurance Primary Threshold to avoid or minimise NICs while still getting a tax-deductible expense for the company.

Dividends: Shareholder Distributions

Dividends are payments made to shareholders from the company's post-Corporation Tax profits. They are not a tax-deductible expense for the company.

Key points about taking dividends:

• No National Insurance: Neither you nor your company pays National Insurance on dividends, which is a significant advantage over salaries.
• Dividend Allowance: For the 2026/27 tax year, you have a Dividend Allowance of £500. You don't pay tax on dividend income within this allowance.
• Dividend Tax Rates: Dividends received above the allowance and your Personal Allowance are taxed at specific rates:
• Basic Rate Band: 10.75% (for income up to £50,270).
• Higher Rate Band: 35.75% (for income between £50,271 and £125,140).
• Additional Rate Band: 39.35% (for income over £125,140).
• (Figures for illustration – check current rates).
• Order of Taxation: Dividends are treated as the 'top slice' of your income. This means your Personal Allowance is used against other income first (like salary), then the Dividend Allowance, and finally, any remaining dividends are taxed at the applicable dividend rates based on your overall income band.

The Salary and Dividend Mix

For many limited company directors, the most tax-efficient strategy combines a small salary with dividends.

Here's a common approach:

1. Small Salary: Pay yourself a salary up to the Personal Allowance (£12,570 for 2026/27). This salary is tax-free for you and tax-deductible for the company. If your company is eligible for the Employment Allowance, it may also avoid employer NICs on this salary. If not, you might set the salary just below the employer NIC Secondary Threshold (around £5,000 per year for 2026/27) to avoid employer NICs altogether, while still qualifying for state benefits.
2. Dividends: Take the rest of your required income as dividends. These are paid from profits after Corporation Tax. You'll use your £500 Dividend Allowance tax-free, and then pay dividend tax at the ordinary, upper, or additional rates depending on your total income.

This combination minimises both employee and employer NICs, while making full use of your Personal Allowance and Dividend Allowance.

Other Considerations

• Pensions: Company contributions to a director's pension scheme are generally tax-deductible for the company and are not treated as a benefit-in-kind for you (within annual limits). This is a highly tax-efficient way to extract profits for your retirement.
• Benefits in Kind (BIKs): Providing yourself with certain benefits (e.g., company car, private medical insurance) can be tax-efficient in some circumstances, but they often incur Class 1A National Insurance for the company and may be taxable on you.
• Director's Loan Accounts: Taking money from your company that isn't salary, dividends, or expense reimbursement creates a Director's Loan. If this account becomes overdrawn and isn't repaid within nine months and one day of your company's year-end, the company will face a Section 455 Corporation Tax charge of 33.75% on the outstanding amount. If the loan exceeds £10,000 and no interest is charged at HMRC's official rate (3.75% for 2026/27), it can also be treated as a Benefit in Kind, leading to personal tax and Class 1A NICs for the company.

Common mistakes

• Not distinguishing between salary and dividends: Treating all money taken from the company as personal drawings without proper categorisation can lead to tax complications.
• Ignoring Director's Loan Account rules: Failing to repay overdrawn director's loans on time can result in significant Section 455 Corporation Tax charges for the company.
• Paying dividends without sufficient profits: Dividends can only be paid from accumulated post-tax profits. Paying them otherwise is illegal and can lead to serious issues.
• Not reviewing your strategy regularly: Tax rates, allowances, and your personal circumstances change. What was efficient last year might not be this year.