Tax-efficient profit extraction strategies: What UK limited company directors need to know
Running a limited company gives you freedom and flexibility — but it also comes with one big question: what’s the best way to take money out of the business without losing too much to tax?
For most directors, profit extraction isn’t just about paying yourself; it’s about striking the right balance between salary, dividends and pension contributions. Each option has its pros and pitfalls, and the right mix depends on your personal goals, company performance and long-term plans.
In this blog, we’ll look at the most tax-efficient profit extraction strategies available to limited company directors in the UK, helping you understand your options clearly and confidently.
Why does profit extraction need a plan?
When you run your own company, you have the freedom to decide how and when you get paid. That flexibility is great — but without a plan, it can also become a tax trap.
If you don’t structure things properly, you could end up paying more in:
- Income tax on your salary
- National Insurance contributions
- Corporation tax on your company profits
With the right planning, you can hold on to more of your hard-earned income and put it to better use. The trick is knowing the three main ways to take money out of your company — through a salary, dividends, or pension contributions.
Should I pay myself a salary or dividends?
It’s a question almost every business owner asks at some point — and for good reason. The mix of salary and dividends is at the core of tax-efficient profit extraction.
Salary
Paying yourself a salary gives you a regular, predictable income and keeps your National Insurance record intact. It can also help you qualify for certain benefits, including the state pension.
For the 2025/26 tax year, there are two main options:
- Low salary (£5,000 per year)
You can pay yourself a salary of £5,000 per year (£416.67 a month). At this level, you won’t pay any Income Tax, Employer NI, or Employee NI, making it simple and cost-effective. You’d then take dividends on top to boost your income.
However, this option no longer earns you a qualifying year for the State Pension, as the NI threshold has dropped to £5,000 this year (down from £9,096).
- Higher salary (£12,570 per year)
Alternatively, you can pay yourself £12,570 per year (£1,047.50 a month). At this level, your company will need to pay Employer National Insurance, but the cost is partly offset because it’s a tax-deductible expense, reducing your Corporation Tax bill.
In fact, the tax saving works out around £518 per year for companies paying 19% Corporation Tax. You’ll also earn a qualifying NI year, which makes this option more beneficial in the long term.
Dividends
After your company pays corporation tax, dividends can be taken from what’s left. It’s often a more tax-efficient choice than paying a higher salary.
For 2025/26, the first £500 of dividends are tax-free. After that, the rates are:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate.
- 39.35% for additional rate.
Dividends don’t attract National Insurance, which keeps your overall tax bill lower. Just remember — you can only take dividends from profits after Corporation Tax, so if your company isn’t making money, dividends aren’t an option.
What is the best way to take money out of my limited company?
In most cases, the most tax-efficient combination is a low salary topped up with dividends. This method helps you remain in the lower tax brackets while keeping both income tax and National Insurance costs down.
Here’s what that could look like in practice:
- Salary of around £12,570 (the personal allowance limit).
- The remainder of your income taken as dividends, within the basic rate band where possible.
This blend ensures you:
- Maintain your National Insurance record.
- Keep income tax and NIC low.
- Take advantage of the lower dividend tax rates.
But that’s not the only option. There’s another powerful tool directors often overlook, i.e. pension contributions.
Directors’ pension contributions
Pensions are one of the most effective ways for directors to extract profits tax-efficiently. Instead of taking all profits as income, you can make employer pension contributions directly from your company.
When your company pays money straight into your pension, it’s counted as an allowable business cost — which means you pay less corporation tax.
You also avoid income tax and National Insurance on those contributions, so the full amount goes to work for you.
Most directors can pay in up to £60,000 a year, and even carry forward unused allowances.
This approach is especially attractive for directors who don’t need to draw all their profits now. It allows you to build long-term wealth while cutting your current-year tax bill — a win-win for retirement planning and profit extraction.
Other ways to extract profit
Beyond salary, dividends and pensions, there are a few additional tactics directors can use to keep things tax-efficient:
- Reclaiming legitimate business expenses from home office costs to travel and training, these reduce your taxable profits.
- Taking advantage of capital gains allowances when selling company assets or shares.
- Using director’s loans carefully, ensuring repayments and withdrawals comply with HMRC rules.
- Making your spouse or partner a shareholder can be a simple way to share income and use both tax allowances.
Get advice first to be sure it’s done properly and meets HMRC rules.
How can a company director reduce their tax bill?
Here are some useful tips for reducing your overall tax:
- Find the right mix of salary and dividends — taking too much salary can mean paying unnecessary tax.
- Maximise pension contributions — they’re one of the few remaining legitimate tax shelters.
- Claim all allowable expenses — it’s surprising how many small costs go unclaimed.
- Plan your dividends — spreading them over multiple tax years can help you stay in lower bands.
- Use your spouse’s allowances if they’re involved in the business.
- Stay updated — tax rules change regularly, so regular reviews with an adviser are essential.
When done right, these steps can significantly improve your limited company director tax position and help you take home more of what you earn.
Common mistakes directors should avoid
- Paying a high salary unnecessarily: this leads to extra NIC with no added benefit.
- Ignoring pension opportunities: a missed chance for long-term tax-free growth.
- Paying dividends without sufficient profit: this can lead to HMRC penalties.
- Not setting aside funds for tax bills: it’s easy to get caught up at the end of the year.
When to seek professional advice
Tax planning for directors is complex — and what’s right for one business may not suit another. The best results come from personalised advice that considers:
- Your company’s profits and cash flow.
- Your personal income needs.
- Long-term financial goals, including retirement plans.
That’s why many company owners turn to experienced advisers for small business tax advice in the UK. With professional guidance, you can build a strategy that’s efficient, compliant and perfectly aligned with your objectives.