When deciding on the most tax-efficient ways to extract cash from a company in the UK, various methods should be considered based on individual circumstances, such as income needs, tax rates, company profits, and long-term financial planning. Below is a brief guide to different strategies, including scenarios in which each might be advantageous, and the exact legal references from UK tax law.

1. Salary

When it may be advantageous:
Paying a salary is particularly beneficial when you want to build up qualifying years for the state pension or national insurance benefits while staying below the threshold that triggers high NIC liabilities. It’s also useful if you have minimal other sources of income, allowing you to fully utilise your Personal Allowance (£12,570 for 2024/25). A small salary also helps the company take advantage of Corporation Tax relief on the amount paid.

Example:
A director who does not have other income may choose to pay themselves a salary just above the lower earnings limit (£6,396 for 2024/25) but below the NIC threshold of £12,570. This way, they gain state pension credits without having to pay NICs.

Following table shows the level of salary and the associated NIC rate;

So, as a director if you decide to draw a salary of more than £758 per month, your company will have to start paying NIC @13.80 as employer. No employer NIC is payable upto the salary of £758 per month. Similarly, you will need to pay employee NIC only if you decide to withdraw a salary in excess of £1,048 per month.

Following income tax rates will apply to your salary depending on the level of your income;

When deciding on the amount of monthly salary, you will need to keep in mind the different levels that will trigger the NIC and income tax (PAYE).

2. Dividends

When it may be advantageous:
Dividends are often more tax-efficient than salary because they are taxed at lower rates and do not attract NICs. This strategy is most advantageous when the company has sufficient post-tax profits to distribute, and the director is within the basic-rate or higher-rate tax bands but wishes to avoid the higher tax burden associated with salary. Dividends are also useful when you want to extract profits from the company while minimising income tax.

There is a dividend allowance of £500 for the tax year 2024/25. This means no tax on the first £500 drawn as dividends from your company. Following table shows the rate of dividend tax for 2024/25;

Example:
A director/shareholder within the basic-rate tax band could pay themselves a small salary and take the remainder of their income as dividends to stay within the lower dividend tax rate of 8.75%.

3. Director’s Loan Account

When it may be advantageous:
Using a director’s loan account is beneficial when you have lent money to the company in the past and wish to withdraw those funds tax-free. This method allows you to avoid both income tax and NICs. It’s especially useful when there is no urgent need for income, but there are historic loans that can be repaid without tax consequences.

Example:
A director who lent their company £30,000 in prior years and wants to withdraw cash tax-free could take this amount as loan repayment, provided it does not exceed the original loan balance.

4. Pension Contributions

When it may be advantageous:
This method is particularly advantageous for long-term tax planning, as pension contributions are exempt from income tax and NICs. Additionally, company pension contributions reduce the company’s taxable profits, offering Corporation Tax relief. This strategy is ideal if you wish to build up a retirement fund while reducing your current tax liabilities.

Example:
A company director who doesn’t need immediate income could have their company pay £60,000 into their pension. This reduces the company’s corporation tax liability and helps build up pension savings without attracting immediate tax charges.

There is annual allowance of £60,000 for the tax year 2024-25. This means you can you can make tax free contribution to your pension pot for upto £60k for the tax year before you get taxed.

5. Expense Reimbursement

When it may be advantageous:
This is useful when you have incurred legitimate business expenses that can be reimbursed without triggering personal tax liabilities. Claiming business expenses, such as travel or office supplies, can effectively increase your take-home pay in a tax-efficient manner. It’s important, however, to ensure the expenses meet HMRC’s definition of allowable business expenses.

Example:
A director who incurs £1,000 in business-related travel expenses can claim reimbursement from the company, effectively receiving this money tax-free, as long as the expenses are wholly, exclusively, and necessarily incurred for business purposes.

6. Share Buyback

When it may be advantageous:
A share buyback is particularly useful when you want to exit the company or reduce your stake. The proceeds are typically subject to Capital Gains Tax (CGT) rather than income tax, and CGT rates (10% or 20%) are often lower than income tax rates. If Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) is available, the CGT rate could be as low as 10%.

Example:
A director who owns a significant number of shares in their company and wishes to reduce their ownership can sell some shares back to the company. If their gain on the sale is £100,000, they may only pay CGT at 10% if they qualify for Business Asset Disposal Relief.

7. Tax Reliefs (e.g., Business Asset Disposal Relief)

When it may be advantageous:
If you are planning to sell your business or reduce your involvement, Business Asset Disposal Relief can significantly reduce your capital gains tax liabilities, applying a 10% CGT rate on qualifying disposals up to a lifetime limit of £1 million. This is highly advantageous when selling or winding down a company and withdrawing profits in a lump sum.

Example:
A director who sells their shares for £600,000 and qualifies for Business Asset Disposal Relief would only pay 10% CGT on the gain, resulting in a £60,000 tax bill, rather than the higher 20% rate.