Tax-Efficient Ways to Extract Cash from a UK Company | Strategies & Tips

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.

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;

	Salary per year	NIC rate
Employee	12,570	8%
Employer	9,100	13.80%

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;

Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

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).

Income	NIC	PAYE/Income tax
£6,396.00	0%	0%
£9,100.00	13.80%	0%
£12,570.00	13.80%	0%
£50,270.00	13.8% & 8%	20%
£125,140.00		40%
£125,141.00		45%

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;

Tax band	Tax rate on dividends over the allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

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%.

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.

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.

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.

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.

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.

Conclusion

Each method of extracting cash from your company offers different advantages depending on your individual tax situation, cash flow needs, and long-term financial goals. Combining several methods may often be the most tax-efficient approach, and it is vital to consult with a qualified tax advisor to ensure compliance with HMRC rules and maximise your tax savings.

If you need tax planning advice, contact FSL Accountancy ltd in confidence. FSL Accountancy ltd has helped many entrepreneurs like you save taxes.

Frequently Asked Questions: Tax-Efficient Cash Extraction from UK Limited Companies

What is the most tax-efficient way to extract money from a UK limited company in 2025-26?

The most tax-efficient approach is typically a combination of low salary plus dividends:

Take a director’s salary of £5,000, £6,500, or £12,570 annually
Extract additional income as dividends from company profits
Consider pension contributions for long-term tax efficiency
Claim legitimate business expenses to reduce personal costs

Why this works: Dividends aren’t subject to National Insurance contributions and have lower tax rates than salary, while a small salary ensures state pension qualifying years.

What is the optimal director’s salary for 2025-26?

The three main optimal salary levels are:

£5,000 – Avoids employer National Insurance (new threshold)
£6,500 – Lower earnings limit for state pension qualifying years
£12,570 – Personal allowance limit (no income tax)

Most recommended: £12,570 as it maximizes the tax-free personal allowance while maintaining state pension contributions.

How much can I take in dividends without paying tax in 2025-26?

You can receive £500 in dividends tax-free (dividend allowance), plus any unused personal allowance. After that, dividend tax rates are:

8.75% for basic rate taxpayers
33.75% for higher rate taxpayers
39.35% for additional rate taxpayers

What are all the ways to extract money from a limited company?

The main extraction methods are:

Director’s salary (subject to income tax and National Insurance)
Dividends (lower tax rates, no National Insurance)
Pension contributions (tax relief, future access)
Director’s loans (temporary, strict rules)
Business expenses (legitimate costs reimbursed tax-free)
Benefits in kind (company cars, phones, etc.)

Should I take salary or dividends first?

Take salary first up to the optimal threshold (typically £12,570), then top up with dividends. This strategy:

Uses your tax-free personal allowance
Maintains state pension contributions
Minimizes National Insurance costs
Provides corporation tax relief on salary

Salary vs Dividends Questions

Why are dividends more tax-efficient than salary?

Dividends are more tax-efficient because:

No National Insurance contributions (saves 8% employee + 15% employer NI)
Lower tax rates (8.75% basic rate vs 20% income tax)
No employer costs beyond corporation tax already paid
Flexible timing – can be paid when profits allow

How do dividend tax rates compare to salary tax rates?

Salary tax (2025-26):

0% up to £12,570 (personal allowance)
20% from £12,571-£50,270
40% from £50,271-£125,140
45% above £125,140
Plus 8% National Insurance (employee) and 15% (employer)

Dividend tax (2025-26):

0% up to £500 (dividend allowance)
8.75% basic rate
33.75% higher rate
39.35% additional rate
No National Insurance

Can I avoid National Insurance completely?

Yes, but with limitations:

Dividends don’t attract National Insurance
However, taking no salary means no state pension contributions
Minimum salary of £6,500 recommended for pension qualifying years
Above £12,570 salary, both employee and employer NI apply

Allowances and Thresholds

What is the dividend allowance for 2025-26?

The dividend allowance is £500 for 2025-26. This means:

First £500 of dividends are tax-free
Applies regardless of other income
Separate from the £12,570 personal allowance
Any dividends above £500 are taxable at dividend rates

How does the personal allowance work with salary and dividends?

The £12,570 personal allowance applies to:

Salary income first
Then other income including dividends
If salary uses full allowance, dividends are taxed from £0 (after £500 dividend allowance)
Allowance reduces for income over £100,000

Pension Contributions

How can pension contributions help with tax-efficient extraction?

Company pension contributions offer excellent tax efficiency:

Corporation tax relief at 19-25%
No National Insurance for company or individual
No income tax when contributed
Annual allowance: £60,000 (2024-25)
Can carry forward unused allowances from previous 3 years

What’s better – pension contributions or dividends?

Pension contributions are more tax-efficient but money is locked away until retirement:

Immediate tax relief vs paying dividend tax now
25% tax-free on withdrawal vs dividend tax
Long-term growth vs immediate access
Best for surplus profits you don’t need immediately

Director’s Loans

How do director’s loans work for cash extraction?

Director’s loans allow temporary access to company funds:

Up to £10,000 can be borrowed interest-free
Must be repaid within 9 months of company year-end
Above £10,000 creates benefit-in-kind tax charge
Cannot be “bed and breakfasted” (repaid and re-borrowed quickly)

What happens if I don’t repay a director’s loan on time?

Late repayment triggers:

Corporation tax charge of 33.75% on outstanding amount
Personal tax may apply if loan exceeds £10,000
Benefit-in-kind reporting requirements
Interest charges at HMRC’s official rate

Large Extractions

How do I extract £100,000+ tax-efficiently?

For large extractions, consider:

Salary: £12,570 (personal allowance)
Dividends: Up to basic rate band limit
Pension contributions: Maximize annual allowance
Spread across tax years to avoid higher rates
Consider spouse’s allowances if they’re shareholders
Professional advice essential for optimal planning

What is Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)?

BADR provides 10% capital gains tax on business disposals:

Lifetime limit: £1 million gains
Requires: 5% shareholding held for 2+ years
Applies to: Share sales, not dividend extraction
Alternative to income extraction when winding up
Consider: Leaving profits in company for future sale

Business Expenses

What business expenses can I claim tax-free?

Legitimate business expenses include:

Travel and subsistence for business purposes
Mobile phones and equipment
Professional development and training
Business entertainment (limited)
Home office costs if working from home
Mileage allowance: 45p per mile (first 10,000 miles)

Can I put personal expenses through the company?

Only legitimate business expenses can be claimed:

Must be “wholly and exclusively” for business
Personal use creates benefit-in-kind charges
HMRC scrutinizes lifestyle expenses carefully
Documentation required for all claims
Professional advice recommended for borderline cases

Tax Planning Strategies

How do I avoid moving into higher tax brackets?

Strategies to stay in lower tax bands:

Monitor total income across salary and dividends
Time dividend payments across tax years
Use spouse’s allowances if they’re shareholders
Maximize pension contributions to reduce taxable income
Consider timing of other income sources

Should I extract profits now or leave them in the company?

Consider these factors:

Current vs future tax rates
Business investment opportunities
Personal cash flow needs
Capital gains vs income tax on eventual sale
Corporation tax relief on retained profits

Compliance and Legal

What records do I need to keep for dividend payments?

Required documentation:

Board meeting minutes declaring dividends
Dividend vouchers for each payment
Company accounts showing available profits
Corporation tax calculations
Personal tax records for self-assessment

Do I need an accountant for tax-efficient extraction?

Professional advice is highly recommended because:

Tax rules are complex and change frequently
Mistakes can be costly in penalties and extra tax
Individual circumstances affect optimal strategies
Compliance requirements must be met precisely
Planning opportunities may be missed without expertise

What are the risks of aggressive tax avoidance?

HMRC has strong anti-avoidance measures:

General Anti-Abuse Rule (GAAR) targets artificial schemes
Transactions in Securities rules prevent income shifting
IR35 legislation affects some contractors
Penalties for getting it wrong can be severe
Stick to established planning methods

Special Circumstances

How do I extract cash when winding up a company?

Options for company closure:

Members’ Voluntary Liquidation (MVL) for capital treatment
Informal strike-off for smaller amounts
Business Asset Disposal Relief may apply
10% capital gains tax vs income tax rates
Professional advice essential for complex closures

Can my spouse help with tax-efficient extraction?

Yes, if properly structured:

Share ownership must reflect genuine entitlement
Avoid artificial arrangements that HMRC challenges
Use both personal allowances and basic rate bands
Consider employment if they contribute to business
Professional structuring required to avoid anti-avoidance rules