Owner-managed companies often need to decide how best to extract profits for directors and shareholders. There are a number of options available, including salary, dividends, and capital distributions—each with differing tax implications for both the company and the individual. This blog outlines the current rules and compares these options using the latest rates and illustrative examples.

Introduction to Profit Extraction

Once a company begins to generate profits, owner-managers need to consider how best to extract those profits in a tax-efficient and commercially sensible way. There is no one-size-fits-all answer, and the right mix will depend on personal income levels, cash flow needs, and longer-term goals such as pension planning or business exit.

The most common profit extraction routes are:

Salary and bonuses – taxed as employment income and deductible for the company;
Dividends – paid out of retained profits and taxed as investment income;
Employer pension contributions – usually tax-deductible for the company and tax-free for the recipient, though this is subject to the individual’s annual allowance.
Capital extractions – such as liquidation distributions or company share buybacks, which may be taxed under Capital Gains Tax (CGT) rules.

Other forms of value extraction include non-cash remuneration, such as benefits-in-kind (e.g. company cars or private health cover), charging rent or interest to the company, and reimbursed expenses. While these can offer additional flexibility or tax advantages in specific cases, they are typically used to supplement – rather than replace – the core profit extraction methods listed above.

Remuneration, Salaries and Bonuses

Cash Remuneration

Salary and cash bonuses remain a straightforward way for owner-directors to extract profits from a company. They are generally deductible expenses for Corporation Tax (CT) purposes, reducing the company’s taxable profits — but they come with significant tax and NIC costs for both the company and the individual.

Where remuneration is paid in cash or as a ‘Readily Convertible Asset’ (RCA):

The employee/director is subject to income tax and employee NICs (Class 1 Primary), deducted via PAYE;
The employer is charged employer NICs (Class 1 Secondary), currently at a rate of 15%;
The company must operate PAYE, withholding tax and NICs at source in accordance with Real Time Information (RTI) reporting requirements.

From the employee’s perspective, there’s little practical distinction between income tax and employee NICs when considering the calculation of net take-home pay. It’s therefore reasonable to group these together under the general heading of “tax.”

However, for shareholder-directors, the position is different. The company must also pay employer NICs at 15%, which doesn’t benefit the individual directly but does reduce the company’s retained profits. In effect, employer NICs are just another form of tax leakage that reduces the amount ultimately available for distribution or reinvestment — so it must be factored into any true measure of tax efficiency.

To demonstrate the real cost, here’s how things look in practice under a few typical scenarios, factoring in both employee and employer NICs:

	Basic Rate Taxpayer	Higher Rate Taxpayer	Additional Rate Taxpayer
Salary / Bonus
Pre-Tax Company Profits	100.00	100.00	100.00
Secondary Class 1 NIC @ 15%	(13.04)	(13.04)	(13.04)
Gross Salary	86.96	86.96	86.96
Income Tax @ 20% / 40% / 45%	(17.39)	(34.78)	(39.13)
Primary Class 1 NIC @ 8% / 2% / 2%	(6.96)	(1.74)	(1.74)

Amount Retained	62.61	50.44	46.09

Total Tax and NICs (Employee)	24.35	36.52	40.87
Effective Tax Cost (%)	37.4%	49.6%	53.9%

From the company’s perspective, the full amount paid — including employer NICs — is typically deductible for Corporation Tax purposes. As a result, Corporation Tax is not factored into the table above, since the £100 cost of paying salary or bonus reduces taxable profits and therefore carries no additional CT cost — this contrasts with dividends, shown further below.

It’s common for directors to take a low salary (often up to the primary NIC threshold) to maintain state pension entitlement and extract further profits through dividends or other means.

Non-Cash Remuneration & Pension Contributions

Instead of taking a cash bonus, owner-managers might consider arranging ongoing company benefits such as a company car or private medical insurance. While these benefits may not trigger employee NICs, they are typically subject to Class 1A NICs at 15%, which limits any employer-side savings.

The most tax-efficient alternative is often to substitute cash bonuses with qualifying tax-exempt benefits — in particular, employer pension contributions to a registered scheme. Subject to the Optional Remuneration Arrangements rules, such benefits can usually be made free of income tax and NICs.

However, with regard to employer pension contributions, care must be taken not to exceed the annual allowance for pensions (currently £60,000), which tapers down for ‘high income individuals’.

Family Wages

It is perfectly acceptable — and often efficient — to pay a salary to a spouse, civil partner, or even a child, provided the payment meets certain conditions. To be deductible for tax purposes, the wages must be:

actually paid (not just accrued);
in return for genuine work done for the business;
commensurate with the duties performed — i.e. at a fair market rate.

Where the individual is assisting with admin, bookkeeping, or other part-time tasks, paying up to the personal allowance or NIC thresholds can be a sensible way to utilise otherwise unused allowances and reduce the company’s taxable profits.

That said, this is an area where care must be taken. HMRC will typically challenge payments where:

there is no employment contract or time records;
the amounts seem excessive for the role;
or, in the case of younger children, the work is not age-appropriate or would not be legal employment under child labour laws.

The key is being able to demonstrate the commercial basis of the arrangement, just as you would with an unrelated employee. Formalising the arrangement with timesheets, bank payments, and job descriptions can make all the difference.

Dividends

Dividends are a common and often more tax-efficient way for shareholder-directors to extract profits — provided the company has sufficient distributable reserves.

Unlike salaries or bonuses, dividends are not deductible for Corporation Tax purposes, but they also do not attract NICs — a key advantage for both the individual and the company. This means that once profits have been taxed at the company level, any dividends paid are subject only to personal income tax at the shareholder level.

Dividends are paid from post-tax company profits, meaning CT must be deducted first before anything can be distributed — unlike salaries, rents, or interest payments, which usually reduce the company’s taxable profit. The net amount actually distributed is then subject to personal income tax at the applicable rates for dividend income:

0% on the first £500 (dividend allowance)
8.75% within the basic rate band
33.75% within the higher rate band
39.35% within the additional rate band

Because they do not attract NICs and are subject to lower personal income tax rates, dividends are generally more tax-efficient than salaries, especially at lower rates of Corporation Tax. However, the tax efficiency can significantly shift depending on the company's taxable profit level (and corresponding CT rate) and the shareholder's marginal rate of personal income tax.

From a shareholder’s perspective, this two-stage tax (CT at company level, then personal income tax) makes the total tax burden sensitive to the company’s marginal CT rate. The higher the CT rate, the less profit remains for distribution — and the greater the effective tax cost.

Here's how the total effective tax cost can compare across different levels of income:

	Basic Rate Taxpayer	Higher Rate Taxpayer	Additional Rate Taxpayer
Corporation Tax @ 19%	26.1%	46.3%	50.9%
Corporation Tax @ 26.5%	32.9%	51.3%	55.4%
Corporation Tax @ 25%	31.6%	50.3%	54.5%

Note: This assumes the personal allowance and dividend allowance have already been used, so all dividend income is taxed at the relevant marginal rate.

The figures above show that dividends remain attractive at lower personal income levels and lower Corporation Tax rates. But as CT rises — particularly under the marginal rate band (profits between £50,000 and £250,000) — the gap narrows. For some higher-earning director-shareholders, the total tax burden on dividends may approach or even exceed that of a salary once Corporation Tax is factored in.

That said, dividends still offer several practical advantages:

No NICs charged — unlike cash salaries and bonuses, dividends are not subject to Class 1 Primary or Secondary NICs, which can lead to significant savings in the total effective tax cost.
Flexible timing — interim dividends can be declared and paid as needed, provided the company has sufficient retained profits.
No PAYE or RTI reporting — dividends do not require payroll submissions or tax to be withheld at source. Instead, they are reported by the shareholder via their annual Self Assessment Tax Return, reducing employer admin.
Simple documentation — dividends must be properly documented via board minutes and dividend vouchers, but otherwise involve minimal compliance.

However, there are also some limitations:

No deduction for Corporation Tax — unlike salaries and bonuses, dividends do not reduce the company’s taxable profits, and are paid out of post-tax profits.
No NIC record and not earnings for pension purposes — dividend income does not count towards qualifying years for the State Pension and does not increase earnings for pension contribution limits.
Must be covered by sufficient distributable reserves — paying dividends in excess of retained profits is unlawful and may expose directors to personal liability, as well as other potential tax and reporting consequences.

Typical Blended Approach

In many cases, the most efficient strategy involves a blended approach: taking a modest salary up to the Class 1 Primary NIC threshold (currently £12,570), with the balance of profits extracted via dividends. This simple, low-cost strategy enables the individual to:

Secure qualifying years for state pension and other contributory benefits
Efficiently utilise their annual personal allowance
Reduce company profits subject to Corporation Tax — often without triggering income tax or NICs if structured correctly

If the company qualifies for the Employment Allowance, the employer NICs on this salary may also be eliminated. The remainder of profits can then be extracted via dividends, benefiting from lower dividend tax rates and no NIC exposure — a structure that offers a compelling balance of tax savings, pension entitlement protection, and administrative simplicity.

If the company is not eligible to claim the Employment Allowance — for example, if it has only one director and no other employees — it may be more efficient to pay a lower salary to reduce the company’s exposure to employer NICs. In such cases, options include keeping the salary below the Secondary Threshold (£5,000 for 2025/26) to avoid all NICs entirely, or paying at least the Lower Earnings Limit (£6,500) to preserve entitlement to state pension credits while limiting the employer’s NIC liability.

Rent and Interest Payments

While salary and dividends are the most common profit extraction methods, there are other routes that can offer useful flexibility in specific situations — particularly where the director personally owns assets used by the company or has lent the company funds.

Rent

If a director personally owns a property used by the company in its trade, they can charge rent to the company. This can provide a useful way to extract profits, as rental payments are:

Generally deductible for Corporation Tax purposes.
Not subject to NICs, making it a clean, NICs-free extraction route.
Taxed as property income on the individual, at non-savings income tax rates (20%, 40%, 45%).

However, this approach has important drawbacks. Rental income is taxed at higher rates than dividends and — crucially — charging rent typically prevents the property from qualifying for full Business Asset Disposal Relief (BADR) on eventual sale. The initial NICs saving is therefore often offset by a higher CGT bill later on.

Interest

Where a director lends money to their company — either via a formal loan agreement or director’s loan account — they can receive interest payments in return.

Key features include:

Interest payments are generally tax-deductible for the company under the loan relationships rules.
Similar to rents, interest income is not subject to NICs (for either party).
Taxed as savings income for the director, with preferential rates and allowances that can significantly reduce the tax payable. Similar to rents, interest income is not subject to NICs (for either party).

Interest income may be wholly or partially covered by:

The Personal Savings Allowance:

£1,000 for basic rate taxpayers
£500 for higher rate taxpayers
£0 for additional rate taxpayers

The 0% Starting Rate Band for savings income:
If a director’s taxable non-savings income (NSI) is below £5,000, up to £5,000 of interest income may also be taxed at 0%. This can provide a further layer of tax-free extraction, in addition to the personal savings allowance.

Note: Interest within the starting rate band does not use up the Personal Savings Allowance. It occupies the first £5,000 of the basic rate band, if not already used by taxable NSI.

Any remaining balance after these allowances is taxed at the applicable savings rate (20%, 40%, or 45%).

One practical point to note: if a UK company pays interest to an individual, it must deduct and withhold 20% income tax at source, reporting it to HMRC via Form CT61 accordingly.

Capital Routes

Capital treatment is often one of the most tax-efficient ways to extract profits from a company — particularly for higher or additional rate taxpayers and those eligible for Business Asset Disposal Relief (BADR). CGT rates are typically lower than income tax rates on salaries, bonuses, or dividends:

18% for basic rate taxpayers
24% for higher and additional rate taxpayers
14% if BADR applies (subject to a £1 million lifetime limit – this is set to rise to 18% from 6 April 2026)

Additionally, the first £3,000 of capital gains (the Annual Exempt Amount) may be tax-free.

However, the gap between income extractions and capital distributions has narrowed. Recent increases in CGT rates, a less favourable BADR regime, and the continued reduction of the Annual Exempt Amount (AEA) mean that capital treatment is not always the most tax-efficient option.

In fact, where profits are extracted within the basic rate band and the AEA has already been used, income distributions (dividends) may result in a lower overall effective tax cost. As ever, the most efficient strategy will depend on the individual's full tax position, profit levels, and timing of extraction.

How Capital Treatment Can Apply

There are two main ways in which cash can be extracted from a company and thereafter be treated as capital proceeds for CGT:

Company Purchase of Own Shares – where the company buys back shares from a shareholder, and the distribution qualifies for CGT treatment (subject to meeting specific conditions).
Company Liquidation – where remaining reserves are distributed to shareholders on winding up. These distributions may be treated as capital rather than income.

Both routes are subject to anti-avoidance rules, but when conditions are met, they can offer significant tax savings compared to ongoing income-based extractions for higher or additional rate taxpayers.

Comparing the Effective Tax Cost

If money is not withdrawn each year and funds are instead retained and extracted later via a qualifying capital distribution, the effective tax cost (corporation tax plus CGT) may be as follows:

	BADR	Basic Rate Taxpayer (No BADR)	Higher Rate Taxpayer (No BADR)
Corporation Tax @ 19%	30.3%	33.6%	38.4%
Corporation Tax @ 26.5%	36.8%	39.7%	44.1%
Corporation Tax @ 25%	35.5%	38.5%	43.0%

These effective rates reflect a two-stage tax: first at the company level (Corporation Tax), then at the shareholder level (CGT on net proceeds).

While capital extraction is not always possible — and typically only arises on significant corporate exit events — it remains an important planning opportunity where available, particularly for shareholders seeking to unlock value in a tax-efficient manner.

Choosing the Right Route

Profit extraction is rarely a one-time decision — it’s a dynamic process that evolves with your business, personal tax position, and wider goals. While the rules and options can seem complex, the right strategy often hinges on understanding a few key trade-offs.

At a glance:

Salaries and bonuses offer Corporation Tax relief and pensionable earnings but come with a high combined tax and NIC burden.
Dividends avoid NICs and may be more tax-efficient at lower Corporation Tax rates, though they must be paid from sufficient retained post-tax profits.
Rent and interest can provide additional flexibility and clean NIC-free extraction routes, but the tax treatment depends heavily on ownership structures and available personal allowances.
Capital distributions — such as via a liquidation or company purchase of own shares — may offer the lowest effective tax cost where BADR applies, but these routes are only available in limited circumstances and subject to qualifying conditions.

The optimal approach often blends methods — for example, a tax-free salary within the personal allowance and NIC thresholds, topped up with dividends and supplemented (where appropriate) with benefits, pension contributions, interest, rent, or longer-term capital planning.

To illustrate how the effective tax cost can differ depending on method and income level, the summary table below compares a range of scenarios based on the current rates and thresholds for the 2025/26 tax year:

	Basic Rate Taxpayer	Higher Rate Taxpayer	Additional Rate Taxpayer
Salary / Bonus	37.4%	49.6%	53.9%

Dividends
Corporation Tax @ 19%	26.1%	46.3%	50.9%
Corporation Tax @ 26.5%	32.9%	51.3%	55.4%
Corporation Tax @ 25%	31.6%	50.3%	54.5%

Capital Distributions – BADR
Corporation Tax @ 19%	30.3%	30.3%	30.3%
Corporation Tax @ 26.5%	36.8%	36.8%	36.8%
Corporation Tax @ 25%	35.5%	35.5%	35.5%

Capital Distributions - No BADR
Corporation Tax @ 19%	33.6%	38.4%	38.4%
Corporation Tax @ 26.5%	39.7%	44.1%	44.1%
Corporation Tax @ 25%	38.5%	43.0%	43.0%

Note: These figures represent simplified scenarios based on current tax rates as of 31 May 2025, assuming all available allowances (e.g. personal allowance, dividend allowance, and CGT AEA) have already been fully utilised. Actual effective rates may be lower depending on your specific circumstances, available allowances, and the timing or structure of each payment. Professional advice should always be sought before implementing a profit extraction strategy.

In practice, tax efficiency is only part of the picture — other commercial and practical factors also play an important role:

Cash flow requirements: What do you need personally, and what does the company need to retain?
State pension and NIC credits: Have you secured qualifying years for state pension purposes?
Administrative burden: Are you willing to operate a PAYE scheme, or would a simpler route suit better?
Pension contributions and allowances: Are you making full use of longer-term planning opportunities?
Exit strategy: Is a capital event on the horizon that might justify retaining funds in the short term?

Taking the time to plan and periodically review your approach can deliver significant tax savings — and just as importantly, ensure your strategy remains aligned with your business and personal goals.

Get in Touch

We work with owner-managed businesses to develop tax-efficient, commercially sound profit extraction strategies. Whether you're optimising your salary/dividend mix, planning a future exit, or simply seeking clarity on your options, we can help you:

Review your current remuneration approach
Model the tax impact of different extraction methods
Plan around changes to CGT, BADR, and Corporation Tax rates
Explore one-off or longer-term extraction strategies
Navigate compliance, documentation, and reporting requirements

If you’d like tailored advice on the most effective way to extract profits for your circumstances, contact us today to arrange a free initial consultation. We’ll help you understand your options—and avoid common pitfalls—so you can make informed decisions with confidence.

This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.

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AUTHOR

Liam O'Riordan

As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.