One of the most significant advantages of running your own limited company is the control you have over how you withdraw income. Unlike sole traders, who are taxed on all business profits, company owners only pay personal tax on the money they actually extract. By using the right combination of strategies, you can significantly reduce your overall tax bill.
Here are the most tax-efficient strategies for extracting profits from your limited company for the 2025/26 tax year.
1. The Classic Strategy: Low Salary, High Dividends
For most company owners, the most tax-efficient structure involves taking a small salary and extracting the remaining profits as dividends.
The Logic: Salaries are a tax-deductible expense for the company (reducing Corporation Tax), but attract National Insurance (NI). Dividends do not attract NI, but are paid out of post-tax profits.
The Optimal Salary (£12,570): For many directors, the optimal salary for 2025/26 is £12,570. This amount is covered by your Personal Allowance, meaning it is free from Income Tax.
The Employment Allowance Factor: Employer’s National Insurance is now 15% on salaries over £5,000. However, if your company qualifies for the £10,500 Employment Allowance, you can pay a salary of £12,570 without incurring any Employer’s NI. Note that “one-man band” companies (where the sole director is the only employee) cannot claim this allowance.
Without Employment Allowance: Even if you have to pay Employer’s NI, a salary of £12,570 is often still efficient because the Corporation Tax relief (up to 26.5%) on the salary plus the NI usually outweighs the NI cost.
The Dividend Allowance: The first £500 of dividend income is tax-free. Beyond this, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
2. Company Pension Contributions
This is widely considered one of the most powerful tax shelters available to company owners.
Tax Efficiency: Unlike dividends, which are paid from taxed profits, company pension contributions are a deductible business expense. This saves your company Corporation Tax at 19%, 25%, or even 26.5%.
No National Insurance: Neither the company nor the director pays NI on pension contributions.
Personal Benefit: The money grows tax-free within the pension fund. Upon retirement (currently accessible from age 55), you can withdraw 25% of the pot as a tax-free lump sum.
Limits: You can generally contribute up to £60,000 per year (the Annual Allowance) tax-efficiently.
3. Charge Rent to Your Company
If you own your business premises personally (e.g., an office or workshop), you can charge your company rent for using it.
Better than Dividends: Rent is a tax-deductible expense for the company, saving Corporation Tax. Although you pay Income Tax on the rent received, there is no National Insurance to pay.
Example: For a basic-rate taxpayer, receiving rent is often more tax-efficient than receiving dividends because the company saves tax on the payment.
Caveat: Charging rent can restrict Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you eventually sell the property, so this trade-off must be weighed carefully.
4. Charge Interest on Directors’ Loans
If you have lent money to your company (for example, to set it up or buy equipment), you should consider charging the company interest on that loan.
The Tax-Free Sweet Spot: You may be able to receive up to £6,000 of interest tax-free. This utilises the £5,000 Starting Rate band (available if your non-savings income is low) and the £1,000 Personal Savings Allowance (for basic-rate taxpayers).
Corporation Tax Savings: The interest paid to you is a deductible expense for the company, reducing its Corporation Tax bill.
Formalities: The interest rate must be a commercial rate. The company must deduct 20% income tax at source and pay it to HMRC, which you can then reclaim if your interest income falls within your tax-free allowances.
5. Trivial Benefits
You can provide yourself with small tax-free gifts known as “trivial benefits.”
The Rules: The gift must cost £50 or less, must not be cash (gift vouchers are fine), and must not be a reward for work performance.
Directors’ Cap: Directors of “close companies” (most small limited companies) can receive up to £300 worth of trivial benefits per tax year (e.g., six £50 gift vouchers).
Efficiency: These benefits are tax-deductible for the company and tax-free for you.
6. Income Splitting with Family
If your spouse, partner, or adult children have unused personal allowances or lower tax bands, you can involve them in the business to lower the overall family tax bill.
Employing Family: You can pay a salary to a family member if they genuinely work for the business. This is tax-deductible for the company. A salary of up to £12,570 is tax-free for them (if they have no other income).
Transferring Shares: You can gift shares to a spouse or civil partner. This allows you to pay them dividends, utilising their dividend allowance and basic-rate tax band (8.75%) rather than your higher-rate band (33.75%).
7. Tax-Free Loans from the Company
You can borrow money from your company tax-free, provided you follow strict rules.
£10,000 Limit: You can borrow up to £10,000 interest-free without incurring a “benefit-in-kind” tax charge.
Repayment Deadline: To avoid a temporary tax charge on the company (known as Section 455 tax at 33.75%), you must repay the loan within nine months of the company’s year-end.
8. “Roller-Coaster” Income
Because you control when dividends are distributed, you can vary your income year-by-year to maximise tax efficiency.
Avoiding Tax Traps: You can keep your income below £50,270 in one year to stay a basic-rate taxpayer, or below £100,000 to avoid losing your Personal Allowance.
Smooth vs. Variable: Instead of taking a steady income, you might take a smaller dividend one year and a larger one the next. This can help you avoid the High Income Child Benefit Charge (which applies if income exceeds £60,000) in alternate years.
Summary of 2025/26 Tax Rates
Corporation Tax: 19% (profits up to £50k), 26.5% (marginal rate £50k-£250k), 25% (profits over £250k).
Employer NI: 15% on salaries over £5,000.
Dividend Tax: 8.75% (Basic), 33.75% (Higher), 39.35% (Additional).
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Disclaimer: This blog post is based on general tax guidance for the 2025/26 tax year and does not constitute professional advice. Tax laws can be complex and subject to change. Please consult a qualified accountant or tax advisor to tailor these strategies to your specific circumstances.