Tax efficient ways to extract profit from a business

What are the most tax efficient ways to extract profit from my business?

What are the most tax efficient ways to extract profit from my business?

At the time of writing there are four options available to extract profits from a limited company – salary, dividends, pension contributions or extracting the profit by selling or winding up the company.


The owner’s other income needs to be taken into account when deciding on the most tax efficient level of salary. Most directors will want to set their salary at £702 per month or £987.50 if they have other staff to take advantage of the Employment Allowance (based at time of writing).


Dividends are generally taken on top of the salary to top up director’s income to the lower rate or higher rate tax thresholds. Currently the first £2,000 dividend is tax free while the payments also benefit from being exempt from National Insurance Contributions.

Pension Contributions

While individuals can make personal pension contributions to increase their lower rate tax band, their company can also make pension contributions on their behalf. This has the effect of reducing the company’s Corporation Tax liability and is a great way to extract profit while benefiting from tax relief.

Capital Distribution

Capital distributions when a company is sold or wound up are taxed in the same way as a capital gain with Entrepreneur’s Relief often available at 10%. However, bear in mind that the profits left in the company would already have been subject to Corporation Tax.


Every business is unique and the owner’s priorities need to be considered when making decisions on the best way to extract profit. While making pension contributions is generally the most tax efficient, the fact that the money is not readily available may not suit some so all factors need to be taken into account.