For many small business owners and independent contractors in the UK, one of the most common questions is: what’s the most tax-efficient way to extract profits from my company? With several recent changes to tax policy, it’s a timely question – and one that can have a significant impact on your personal finances.
In this article, we’ll explore the key methods of profit extraction, how recent tax changes affect your choices, and what steps you can take to maximise efficiency.
Salaries vs Dividends – the classic combination
Most owner-directors opt for a mix of salary and dividends to extract income from their limited company. Why? Because it can provide a balance between minimising income tax and maximising National Insurance (NI) efficiency.
- Salary: A modest salary (typically up to the National Insurance primary threshold – £12,570 in 2025/26) ensures you benefit from qualifying years for state pension and other entitlements, without incurring employee or employer NI contributions.
- Dividends: Once your salary is set, dividends are usually the most tax-efficient way to extract further income. Dividends are not subject to NI and are taxed at lower rates than salary income:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
However, the dividend allowance was cut again from £1,000 to £500 from April 2024, reducing the amount you can receive tax-free. This makes careful planning even more important.
Consider employer pension contributions
Another increasingly popular option is to extract profits via employer pension contributions. These contributions are made directly from your company and are:
- Tax-deductible for the company (provided they meet the “wholly and exclusively for business purposes” test)
- Not subject to income tax or NI
- Beneficial for long-term wealth planning
You can contribute up to £60,000 per year (2025/26 annual allowance), though unused allowances from the past three years can be carried forward under certain conditions. Pension contributions are especially effective for directors nearing retirement or looking to grow personal wealth in a tax-efficient wrapper.
Use of Director’s loans – with caution
A director’s loan account (DLA) can be used to temporarily take funds from your company without immediate tax implications. However, this must be repaid within nine months of the company’s year-end to avoid a 33.75% Section 455 tax charge.
If not repaid on time, the company pays the charge (although this can be reclaimed when the loan is eventually repaid). Additionally, loans over £10,000 may be treated as a benefit-in-kind, attracting personal tax and Class 1A NI for the company.
In short, DLAs can be useful as a short-term strategy but should be managed carefully and not relied upon for long-term profit extraction.
Profit extraction through rent or asset ownership
If you personally own a property or asset that your company uses — such as an office, warehouse, or equipment — you may consider charging commercial rent. This is tax-deductible for the company and treated as personal rental income (subject to income tax but not NI).
However, you’ll need to weigh this against capital gains implications and pension contribution eligibility, as rental income doesn’t count as ‘relevant earnings’ for pension purposes.
Family involvement and spouse salaries
Employing a spouse or family member can also be tax-efficient — provided they genuinely work in the business and are paid a market-appropriate wage. This allows you to make use of their personal allowance (£12,570), basic rate tax bands.
Be mindful, though — HMRC closely scrutinises arrangements that appear artificial or don’t reflect genuine work carried out.
Plan ahead and get advice
Ultimately, there is no “one size fits all” approach. The most tax-efficient strategy will depend on your company’s profits, personal circumstances, and long-term financial goals. Regular reviews and forward planning are essential — especially as allowances shrink and tax rates shift.
At Hillier Hopkins, we work closely with owner-managed businesses and independent contractors to help them keep more of what they earn — through tailored tax planning, smart structuring, and clear, proactive advice. Get in touch today to arrange a conversation with one of our expert advisors and take the next step toward more efficient profit extraction.
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