If you’re running a personal or family business, figuring out the most tax-efficient ways to take money out of your company—whether to cover living expenses or invest further—is crucial. While there’s no one-size-fits-all strategy, combining a modest salary with dividend payments is a commonly preferred method.

Salary: A Strategic Approach

Paying yourself a salary has dual benefits. Not only can your company deduct this salary, along with any employer’s National Insurance contributions, from its taxable profits, but if structured correctly you can also enjoy these payments tax-free. For instance, if your salary remains within your personal allowance (up to £12,570 for 2024/25), it’s exempt from tax and, if below the Class 1 primary threshold, from employee’s National Insurance too.

A particularly clever strategy involves paying a salary that secures you a qualifying year for state pension purposes without needing to pay National Insurance. For the year 2024/25, a salary between £6,396 and £12,570 achieves this, as it’s considered to have paid National Insurance at a notional zero rate.

However, there are implications for employer’s National Insurance, which is due at 13.8% on earnings over £9,100 unless specific conditions apply. If you’re not eligible for the Employment Allowance—common if you’re the sole employee and a director—the National Insurance cost on an optimal salary of £12,570 would be around £478.86, yet this is offset by tax deductions.

Dividends: Maximising Your Take-Home

After optimising your salary, extracting further profits as dividends is generally more tax-efficient, thanks to lower tax rates and a tax-free allowance on dividends (£500 for 2024/25). However, dividends must be drawn from retained profits and proportional to shareholdings unless varied by using an alphabet share structure, which can align dividends with individual circumstances.

Keep in mind that dividends come from post-tax profits, with corporation tax already applied at rates between 19% and 25%. Once any available allowances are exhausted, dividends will be taxed between 8.75% and 39.35%, depending on your income band.

Other Considerations

Besides salaries and dividends, other profit extraction methods include benefits in kind or renting if you operate from a home office. Additionally, making pension contributions can also be a tax-efficient strategy for the company.

Conclusion

Choosing the right mix of salary and dividends depends heavily on your personal and business circumstances. By planning strategically, you can minimise your tax liability and maximise the benefits. If you’re looking for tailored advice that takes into account the specifics of your situation, consider consulting with a knowledgeable adviser from Jon Davies Accountants. We’re here to help ensure that your financial planning meets your personal and professional needs efficiently.

Engage with Us

Do you have specific challenges or questions about extracting profits from your company? Drop us a message or comment below. We’re here to provide expert guidance tailored to your unique business needs.

 
 
 
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.

Any questions?

If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant