Extracting Profits Tax-Efficiently

Key facts

Salary: Corporation Tax deductible but attracts Income Tax and NI.
Dividends: No NI, lower tax rates, but paid from post-CT profits.
Employer pension: CT deductible, no NI, no personal tax — most efficient per pound.
Rent: If you own premises personally, rent paid by the company is CT deductible.
The optimal strategy usually combines several methods to use all available allowances.

Why Extraction Method Matters

As a limited company director, your profits sit inside the company until you extract them. Different extraction methods attract different taxes. By combining multiple methods strategically, you can significantly reduce the total tax paid.^[1]

Extraction Methods Compared

Method	CT Deductible?	NI Payable?	Personal Tax
Salary	Yes	Employee + Employer NI	Income Tax at marginal rate
Dividends	No (paid from post-CT profits)	No	8.75% / 33.75% / 39.35%
Employer pension	Yes	No	No (tax on withdrawal later)
Rent	Yes	No	Income Tax on rental profit
Interest on director loan	Yes (with restrictions)	No	Income Tax at savings rates
Director loan (S455)	No	No	33.75% company tax if not repaid in 9 months

1. Salary

Salary is deductible for Corporation Tax and builds NI qualifying years, but it attracts both employee and employer NI.^[4]

Set at £12,570 to use the full personal allowance with no employee NI
Employer NI: 15% on earnings above £5,000 = £1,136
CT saving on salary + employer NI: (£12,570 + £1,136) × 19% = £2,604
Net CT saving after employer NI: £2,604 − £1,136 = £1,468

2. Dividends

Dividends avoid NI entirely but are paid from post-Corporation Tax profits, so the company has already paid 19%–25% CT on the underlying profits.^[1]

Band	Dividend Tax Rate	Effective Rate (including 19% CT)	Effective Rate (including 25% CT)
First £500	0% (dividend allowance)	19.0%	25.0%
Basic rate	8.75%	26.1%	31.6%
Higher rate	33.75%	46.3%	50.3%
Additional rate	39.35%	50.9%	54.5%

3. Employer Pension Contributions

The single most tax-efficient extraction method in most cases:^[2]

CT deductible — saves 19%–25%
No employer NI — saves 15%
No employee NI or Income Tax on the contribution
Up to £60,000 per year (annual allowance), plus carry forward
Not limited by your salary level

Example: Your company contributes £40,000 to your pension. CT saving at 25%: £10,000. NI saving (vs salary): £6,000. That’s £16,000 saved compared to paying £40,000 as salary. The trade-off: pension funds are locked until age 55 (rising to 57).

4. Rent

If you personally own property used by the company (e.g., a home office or commercial premises), you can charge a commercial rent:

Rent is CT deductible for the company
You declare it as property income and can deduct property expenses
No NI on rental income
Rent must be at market rate — HMRC can challenge uncommercial amounts

5. Interest on Director Loans

If you have lent money to your company, it can pay you interest. This is CT deductible for the company and taxed as savings income for you (potentially at 0% within the personal savings allowance). The company must deduct 20% basic-rate tax at source and report via form CT61.

6. Director Loans (Avoid)

Borrowing from the company is not a genuine extraction method and can be costly:^[3]

Loans not repaid within 9 months of year end trigger a 33.75% S455 tax
If no interest is charged, there is a benefit-in-kind charge
The S455 tax is refundable when the loan is repaid, but it ties up cash

The Optimal Combination

For a company with £100,000 of available profit and a sole director with no other income:

Method	Amount	Tax Cost
Salary (personal allowance)	£12,570	£1,136 employer NI
Employer pension	£40,000	£0
Dividends	£37,200 (from post-CT profits)	£3,211 dividend tax
Corporation Tax on remaining profit	—	£8,925
Total tax	—	£13,272

Compare this with taking £100,000 as salary: approximately £38,000 in total tax and NI. The combined approach saves over £24,000.

Frequently Asked Questions

What is the most tax-efficient way to take money from my company?

For most directors in 2025/26, the optimal combination is: (1) a small salary around £12,570 (using your personal allowance), (2) employer pension contributions up to £60,000, and (3) dividends for additional income needed. The exact mix depends on your personal circumstances and other income.

Can I pay myself rent from my company?

Yes, if you personally own property that the company uses (such as a home office or commercial premises). The rent must be at a commercial (market) rate. It is a deductible expense for the company, and you declare it as property income on your personal tax return. You may be able to deduct expenses against it.

Are director loans a good way to extract profits?

Director loans (borrowing from the company) are not a tax-efficient extraction method. If not repaid within 9 months of the accounting year end, the company pays a 33.75% “Section 455” tax (refundable on repayment). There may also be a benefit-in-kind charge if no interest is paid.

Can my company pay my personal expenses?

Only if the expense is “wholly, exclusively and necessarily” for business. Personal expenses paid by the company are treated as benefits in kind, subject to Income Tax and Class 1A NI.

Sources

Tax on dividends — GOV.UK
Tax on your private pension contributions — GOV.UK
Directors' loans — GOV.UK
National Insurance rates and categories — GOV.UK