Oct 19
The main ways to extract profits from a limited company are salary, dividends, employer pension contributions, repayment of money lent to the company and, ultimately, a sale or liquidation. Many owner-managers benefit from combining a carefully chosen salary with dividends, pension funding and a planned capital exit. The best mix depends on profits, allowances and retirement timing. Dividend tax rates increased in April 2026, while Business Asset Disposal Relief now taxes qualifying gains at 18%. Planning several years ahead improves opportunities to manage tax, working capital and relief conditions.
You can receive company funds as salary, dividends, employer pension contributions, repayment of genuine director’s loans or proceeds from selling or winding up the business. Each has different tax consequences. Salary can be a deductible employment cost, dividends come from distributable profits after Corporation Tax, qualifying employer pension contributions can receive Corporation Tax relief, and a properly structured exit may generate a capital gain rather than dividend income.
Company money is separate from personal funds. Consider business cash needs and personal tax before withdrawing any of it.
Start with Corporation Tax. The small-profits rate is 19% for profits of £50,000 or less and the main rate is 25% above £250,000, with marginal relief between them. Under GOV.UK’s corporation tax guidance, a company with £100,000 in taxable profits over a full year, no associated companies and no special adjustments would pay £22,750. Thresholds are reduced where associated companies or short accounting periods apply.
The dividend tax rates for 2026/27 rose in the basic and higher bands; the additional rate stayed unchanged.
| Item | 2026/27 |
|---|---|
| Dividend Allowance | £500 |
| Basic rate dividend tax | 10.75% |
| Higher rate dividend tax | 35.75% |
| Additional rate dividend tax | 39.35% |
| Personal Allowance | £12,570, subject to income taper |
| Employer National Insurance | Usually 15% above £5,000 yearly |
| Route | Treatment for the company | Treatment for you | Best used for |
|---|---|---|---|
| Salary | Normally deductible; employer National Insurance may apply | Income Tax and possible employee National Insurance | Earnings and a qualifying National Insurance record |
| Dividends | Not deductible; require distributable profits | Dividend tax after available allowances | Planned withdrawals within tax bands |
| Employer pension contribution | Usually deductible if wholly for business purposes; ordinarily no National Insurance | No immediate income tax, subject to pension allowances | Funding retirement without immediate personal withdrawal |
| Director’s loan repayment | Repayment of capital is not deductible | Normally tax-free where company genuinely owes you money | Recovering funds previously lent |
| Sale or liquidation | Depends on transaction and company position | Usually capital treatment where applicable, possibly with relief | Final retirement or exit |
Many directors set salary around the lower earnings limit of £6,708 in 2026/27 to help secure a qualifying National Insurance year, then use dividends for additional withdrawals. The employer’s National Insurance threshold is only £5,000, however. Whether a higher salary makes sense depends on deductible costs, personal tax and access to Employment Allowance. A company whose sole director is its only employee liable for employer National Insurance cannot normally claim that allowance.
A company may pay dividends only from profits available for distribution, supported by properly prepared accounts. Dividends are not deductible for Corporation Tax, and improperly declared amounts may have to be repaid. Regular management accounts help establish available reserves, while a 13 week cash flow forecast shows whether the business can actually afford the payment.
Spreading dividends over tax years may reduce exposure to higher rates. Payments to spouses can also be efficient where genuine share ownership exists, but settlements legislation and share rights need consideration. Seek advice before altering ownership or paying different classes of shares.
For eligible owner-directors, employer pension contributions can be especially valuable before retirement. Contributions to a registered scheme are generally deductible when incurred wholly and exclusively for the company’s trade. They do not normally trigger employer National Insurance or immediate Income Tax for the director, although pension annual allowance charges can still arise.
Consider a £10,000 slice of company profits that would otherwise be taxed at 25%, assuming no other adjustments. Two simplified outcomes illustrate the difference:
This does not compare identical cash outcomes: pension savings are invested until eligible access and most later withdrawals are taxable. Investment risk and personal circumstances also matter.
The annual allowance is £60,000, including employer contributions, with possible three-year carry-forward. Higher incomes can trigger tapering, while flexibly accessed defined-contribution pensions may be subject to a £10,000 money purchase annual allowance. The standard lump sum allowance generally limits tax-free pension payments to £268,275, although protections can apply.
Estate planning is changing too. Most unused pension funds and certain death benefits will enter the Inheritance Tax estate for deaths from 6 April 2027, under GOV.UK’s guidance on unused pension funds. That makes coordinated pension and succession advice increasingly important.
Selling shares or receiving qualifying liquidation distributions can result in Capital Gains Tax rather than dividend tax. The treatment depends on the legal structure and applicable anti-avoidance rules.
Business Asset Disposal Relief applies an 18% rate to qualifying disposals from 6 April 2026, subject to a £1 million lifetime limit, as described in the GOV.UK helpsheet. Normal gains rates are generally 18% and 24%. On a fully qualifying £500,000 gain, the illustrative liability is £90,000 with relief versus £120,000 at 24%, saving £30,000, before personal allowances or other adjustments.
For a normal share disposal, you must generally have been an officer or employee of a trading company for at least two years and held 5% of ordinary shares and voting rights, plus the required economic entitlement to profits, assets or sale proceeds. Excess non-trading activity can jeopardise relief. Review cash and investment holdings early; our guide to how earn-outs work when you sell explains deferred consideration.
Where there is no buyer, a solvent company may use a members’ voluntary liquidation to distribute surplus assets as capital. A licensed insolvency practitioner must oversee the process, and directors must make a statutory declaration of solvency after proper enquiry. Capital treatment does not automatically guarantee Business Asset Disposal Relief.
Watch HMRC’s anti-phoenix rule. Under HMRC’s guidance, a winding-up distribution can be treated as income when several conditions apply, including a 5% holding, a close company, involvement in a similar trade within two years and a principal tax-avoidance purpose. Starting another venture therefore needs careful advice.
Review financial performance through key financial KPIs and use cloud accounting to improve record quality.
Withdrawals require special care when solvency is uncertain. director duties during insolvency require appropriate regard to creditors, and some transactions may later be challenged. Look for financial distress warning signs and address HMRC tax debt rather than distributing funds needed to meet obligations.
Recovery accountants can help improve cash flow. Where the business remains viable, a company voluntary arrangement may allow repayment arrangements with creditors while trading continues.
Owner-managers operating across borders need to consider the tax residence of themselves and their companies, dividends, pensions and double-taxation relief. Our guide to setting up a company in both the UK and Ireland and article on sterling and euro books explain practical records. Obtain cross-border accounting and tax advice before moving profits or changing personal residence.
If you intend to sell, potential buyers may request reliable financial statements, and an external audit can offer independent assurance where appropriate.
Often a combination of salary, dividends and employer pension contributions, followed by a carefully planned sale or liquidation. The best choice depends on company solvency, available reliefs, personal taxation and retirement needs.
Neither is always preferable. Salary is normally deductible but may attract National Insurance; dividends are paid from distributable profits after Corporation Tax and can attract additional personal tax.
Above the £500 dividend allowance and any unused Personal Allowance, basic-rate dividends attract 10.75%, higher-rate dividends 35.75% and additional-rate dividends 39.35%.
Usually up to 25% can be taken tax-free, within the standard £268,275 lump sum allowance. Most other pension withdrawals are taxed as income, and individual protections may change the limit.
If retirement is approaching, early planning can improve both tax efficiency and financial security. Our team can model salary, dividend and pension options, coordinate with your financial adviser, and involve insolvency specialists when a solvent liquidation is suitable. Contact SCC Chartered Accountants to arrange a conversation before making substantial withdrawals or beginning the disposal process.
Contact us to find out more about SCC services
NI:
UK
ROI:
Email Address:
Friday
Jun 1
Jan 5
Our award-winning team across our offices in the UK and Ireland collaborates to deliver the highest standards in a fast moving and evolving manner.
