This is one of the most frequent questions we’re asked by our owner-managed company clients.
Unfortunately, the stock answer, “Take a salary up to your Personal Allowance and take the rest as dividends” is not always the answer. The truth is, without performing individualised calculations, the most honest response we can give is, “It depends…”
Individual calculations should be carried out to arrive at the optimal profit extraction strategy for most businesses. This is because the optimal extraction method will depend on a number of factors, including but not limited to:
- The company’s profit which determines its rate of Corporation Tax
- The number of director/shareholders
- The available distributable reserves in the company
- The director/shareholder’s other income (which determines their marginal rate of income tax and the amount of Personal Allowance available to them)
- The director/shareholder’s age – those aged 66 or over do not pay employees National Insurance Contributions
- The availability of the £10,500 Employment Allowance (EA) – the company might not qualify for EA or it might already be utilised by other employees’ salaries
- The National Minimum/Living Wage legislation
Beyond tax efficiency, it’s essential to consider the financial needs and goals of the director/shareholders. Extracting all available funds may result in higher tax liabilities. In contrast, retaining profits within the company could lead to more favourable tax treatment later—such as Business Asset Disposal Relief (BADR) on a future sale or liquidation.
For many, the traditional approach of taking a salary equal to the Personal Allowance and topping up with dividends to meet living costs remains tax-efficient. However, this isn’t always suitable – especially if directors need to demonstrate a market-rate salary for commercial reasons, such as securing personal finance.
