Tax Reliefs and Profit Extraction for UK Limited Companies

You can take funds from the company as a salary, dividends, pension contributions, or a director's loan, and each option can have a big impact on personal and corporate tax liabilities. This guide considers the best ways to extract profit from your company with a view to allowing you to pay the least tax overall and pay the least in the 2025-26 tax year.

Why Profit Extraction Matters?

As one might expect, profit extraction refers to how business owners, particularly directors or shareholders of limited companies, take money out of their business for personal use. Done incorrectly, this may result in paying more tax than you are required to. However, with some careful planning, it is possible to optimise income while minimising exposure to personal and corporate tax.

Salary and National Insurance Issues

As a company director, you would generally be considered an employee of the company and would therefore have a right to be paid a salary through the payroll. Here’s how:

• Salaries are a legitimate business expense and can be deducted from profits when calculating corporation tax.

• You may elect to have a salary just under the main National Insurance threshold (£12,570 in 2025/26) to pay no NI and derive the advantages of tax reliefs.

• You will still need to process a small business tax return or PAYE scheme to report that you have made salary payments.

Tip: Withholding a nominal salary will generally prove more tax-efficient than paying a salary only.

Dividends: A Tax-Efficient Favourite

Many UK company directors choose dividends as their investment. Dividends are not subject to National Insurance payments and are taxed at a lower rate than income.

The dividend allowance is £500 for 2025-26. Get more information on https://www.gov.uk/tax-on-dividends

On earnings above this, dividends are taxed as per the government in the UK at:

• Basic-rate taxpayers: 8.75%
• Higher-rate taxpayers: 33.75%
• Additional-rate taxpayers: 39.35%
• Non-taxpayers: May qualify for a 0% rate on dividends within the dividend allowance

To pay dividends:

• You need earnings from which to pay dividends (i.e., after corporation tax).
• Dividends need to be declared correctly in board minutes and on dividend vouchers.

Let’s understand with an example!

You have £3,000 in dividends and earn £29,570 from wages during the 2024 to 2025 tax year.

This gives you a total income of £32,570.

You have a Personal Allowance of £12,570, subtract that from your total income to leave you with a taxable income of £20,000.

You are still in the basic rate tax band, so you would be liable for:

• 20% tax on £17,000 of wages
• No tax on £500 of dividends, because of the dividend allowance
• 8.75% tax on £2,500 of dividends

Pension Contributions

Another smart way to make a profit is to make pension contributions via your limited company. Why?

Employer pension contributions can be written off, which will then reduce your corporation's tax.

They are not liable for National Insurance or income tax (up to the limits of the annual pension allowance).

A pension like a SIPP (Self-Invested Personal Pension) can offer you investment choices but still enable your business to make contributions of up to £60,000 each year (2025/26), with a cap related to your income level.

Director’s Loans

Director’s loans provide a method of extracting profits from your business without creating an immediate tax liability for you.

You borrow money from your company and repay at a later date, usually within nine months of the end of your business’s accounting period (AP).

The tax implications can be significant:

• Income Tax: You will not generally be liable for income tax on directors’ loans; however, you must declare a ‘written off’ (non-repayable) loan on your self-assessment tax return.

• National Insurance: Your business is liable for Class 1 National Insurance if the loan is written off or exceeds £ 10,000; you must repay it before being classified as a benefit in kind.

• Corporation Tax: Loans made by close company directors to a director with a material interest in the business, exceeding £ 15,000, could be subject to Corporation Tax, which is refundable upon repayment of the loan.

Tip: Use it with caution to avoid compromising your business cash flow, which may lead to personal debts that you are unable to manage.

Claiming Business Expenses

Some of the most common items you can claim for are the following:

• Business travel
• Home office costs
• Training specific to your industry
• Phone and internet bills
• Professional subscriptions

It is essential to maintain receipts and records for claims when lodging your company tax return online.

Don’t Overlook Tax Reliefs

Your limited company may qualify for several tax reliefs that can lower your tax bill:

• R&D Tax Credits: Even small improvements or innovations may qualify.

• Annual Investment Allowance (AIA): Claim up to £1,000,000 in tax relief on eligible capital purchases.

• Business Asset Disposal Relief: Reduces Capital Gains Tax to 10% when you sell your business (on qualifying gains).

Working with a qualified tax advisor ensures you don’t miss out on these valuable reliefs and can plan more effectively.

Conclusion

Withdrawing profit from your UK limited company isn’t just a matter of cashing out of the business; it’s about doing it tax efficiently and legally. A sensible, tax-efficient mix of salary, dividends, pensions, and expense claims provides this mix.

But let’s face it: tax planning can seem heavy when you’re already wearing lots of hats for your business. That’s where Taxd comes in. Want to know how tax-efficient profit strategies work? Let Taxd take the pain out of how to complete a company tax return online and get the most out of what's available to you by law.

FAQs

What is the most tax-efficient way to withdraw money from your limited Company in the UK?

For most directors, the most tax-effective way of doing this is to mix a low salary (to stay within NI limits) and some dividends (as dividends are taxed at much lower rates than salary).

Is it still possible for me to get tax relief if I’m a very small business?

Yes! The majority of tax reliefs (including things like the Annual Investment Allowance and simplified expenses) were designed with SMEs and startups in mind. Ensure you understand what applies to you.

How can I e-file the Company tax return online?

You can file your business tax return online via HMRC’s portal or through a service like Taxd, which simplifies the process, provides professional support, and automates compliance.

Can I hire my family members to save on taxes?

Yes, if they’re actually doing something for your business and are paid a fair wage. It’s a well-worn and legitimate form of income splitting by small business owners.

What if I borrow a director’s loan and fail to pay it back on time?

Directors' loans not repaid are taxed at 33.75% after 9 months from the end of your accounting period. This tax is refundable once you repay the loan, but it’s a penalty you should try to avoid by paying on time.