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How to extract profits from a Limited Company

  • Writer: Laura Seeley
    Laura Seeley
  • Feb 5
  • 4 min read

Updated: Mar 6

One of the most common questions we get at Your Accounting Club is: "How do I actually get my money out of the business?"

When you move from being a sole trader to a Limited Company, you can no longer just dip into the bank account whenever you need cash. The company is a separate legal entity, and every pound you take must be classified correctly for HMRC.

Here’s our guide to the most tax-efficient ways to extract profits in the 2025/26 tax year.


1. The "Sweet Spot": Salary & Dividends


For most directors, the most tax-efficient strategy is a combination of a low salary and the rest in dividends.

  • The Salary (£12,570): We usually recommend taking a salary up to the Personal Allowance threshold.

    • The Benefit: It is a tax-deductible expense for the company (reducing your Corporation Tax bill) and it secures your qualifying year for the State Pension.

    • The Cost: While you won't pay Income Tax or Employee NI at this level, the company will pay a small amount of Employer National Insurance (15% on earnings over £5,000). However, the Corporation Tax savings almost always outweigh this cost.

  • The Dividends: Once your salary is set, you take the rest of your "pay" as dividends from the company's post-tax profits.

    • The Benefit: Dividends do not attract National Insurance, making them "cheaper" than a high salary.

    • The Rates: You get a £500 tax-free dividend allowance. After that, you pay 8.75% (Basic Rate) or 33.75% (Higher Rate).


2:.The "Cost of Living" Strategy (50/50 Split)


If you need to draw around £50,000 to sustain your household, a 50/50 split means taking roughly £25,000 in Salary and £25,000 in Dividends.

Here is how the math works in the current tax environment:

1. The Salary (£25,000)

Taking a higher salary provides a guaranteed monthly "take-home" that mortgage lenders love, but it does come with more tax friction than a low salary.

  • Income Tax: The first £12,570 is tax-free. You will pay 20% tax on the remaining £12,430 (approx. £2,486).

  • Employee NI: You pay 8% National Insurance on everything over £12,570 (approx. £994).

  • Employer NI: Your company pays 15% NI on everything over £5,000 (approx. £3,000). Note: If you have other employees, this £3,000 might be wiped out by the £10,500 Employment Allowance.

2. The Dividends (£25,000)

Dividends are paid from what's left after Corporation Tax. Because your salary has already used up your Personal Allowance, the tax on these is:

  • Dividend Allowance: The first £500 is tax-free.

  • Basic Rate Tax: The remaining £24,500 is taxed at 8.75% (approx. £2,144).

3. The Total Outcome

  • Gross Total: £50,000

  • Total Personal Tax & NI: ~£5,624

  • Estimated Net Take-Home: ~£44,376 per year (£3,698 per month)


3. Pension Contributions: The Long Game


If you don’t need the cash immediately, paying directly into your pension is arguably the most tax-efficient move you can make.

  • Company Benefit: Pension contributions are an allowable business expense. Every £1,000 the company puts into your pension saves at least £190 in Corporation Tax.

  • Personal Benefit: There is no Income Tax or National Insurance for you to pay on the contribution. It’s "gross" money going straight into your pot.


4. Reimbursed Expenses & Home Office


Don't forget the small wins. If you use your personal phone, internet, or home as an office for the business, you can "charge" the company for these.

  • Use of Home as Office: You can claim a flat rate of £6 per week (£312 per year) without needing to keep receipts. It’s a tax-free way to move a small amount of cash from the business to your pocket.


5. The Director’s Loan Account (DLA)


A Director's Loan is money you take that isn't salary, dividends, or an expense.

  • The 9-Month Rule: You can borrow money from your company, but if you don't pay it back within 9 months of your year-end, the company has to pay a "temporary" tax called S455 (at 33.75%).

  • The £10,000 Limit: If you owe the company more than £10,000 at any point, it's treated as a "Benefit in Kind," and you'll have personal tax to pay on the "interest" you've saved.


6. Charging Interest or Rent


If you have personally loaned the company money to get it started, or if the company uses your personal property (like a garage for storage), you can charge the company interest or rent.

  • The Benefit: The company gets tax relief on the payment.

  • The Catch: You must report this as income on your personal Self-Assessment, and for interest, the company must usually deduct 20% tax upfront and send it to HMRC (using a form CT61).


How We Help


The "perfect" mix of salary, dividends, and pensions changes every year as tax rates shift. At Your Accounting Club, we run the numbers for our clients every year to ensure their "drawings" are set up for maximum efficiency for the year ahead.


📍 Based in Sudbury, Suffolk — supporting businesses locally and nationwide. 💬 Want to find your own "tax sweet spot"? Comment “Join The Club” to apply to be a client ✉️

 
 
 

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