If you are a sole trader, withdrawing money from your business is quite simple, as you and the business are essentially the same legal entity. However, if you have formed a limited company, in which you are now the director and shareholder, getting money out of your company is a little more complex. 
 
There are five main ways to extract money from your company that are legal and tax efficient. A combination of these methods can be the most efficient way to minimise your tax liabilities and maximise your take home funds. 

Salary 

Paying yourself a salary is the simplest way to get money from your business, however, it is not the most tax-efficient, so it should be combined with other methods. 
 
You can earn up to £12,570 (known as the Personal Allowance) before income tax in the tax year of 2021/2022. To protect your state pension entitlement, you will need to pay yourself at least £8,840 in the tax year of 2021/2022. 
 
Each year, we provide a tax-efficient salary strategy to our clients, based on their circumstances. For the 2021/22 tax year, as a director, and assuming you have no other sources of income, the most tax-efficient salary will usually be £797 per month. 

Dividends 

Dividends are payments made to company shareholders. To supplement the above salary in a tax-efficient way, you can pay yourself dividends from your after-tax company profits. 
 
If you have no other income besides the £797 per month salary, the first £3,006 of dividends is tax free (as this is covered by the remaining Personal Allowance). 
The next £2,000 of dividends will also be tax-free as is covered by the Dividend Allowance. 
 
So, at this point, you will have extracted £14,570 from the company with no Income (Personal) Tax or National Insurance due. 
 
Further dividends are then taxed based on your tax bands with the next band of dividends of £35,700 being taxed at 7.5%, before reaching the higher rate of 32.5%. 
 
See below for the 2021/2022 tax year rates: 
Income Tax (excl. Scotland) 
Rate 
Dividend Tax 
Rate 
up to £12,570 (personal allowance) 
0% 
up to £2000 (your allowance) 
0% 
Basic Rate £12,570-£50,270 
20% 
Basic Rate £2,001-£37,700 
7.5 
Higher Rate £50271-£150,000 
40% 
Higher Rate £37,001-£150,000 
32.5% 
Additional Rate £150,000+ 
45% 
Additional Rate £150,000+ 
38.1% 
This clearly demonstrates that the tax paid on dividends is far less than that paid on a salary and is therefore a more tax-efficient way to get money out of your company. 
 
When choosing your combination of salary and dividends, you need to take into consideration any other forms of income you receive that could affect your tax calculations, such as savings, investment properties, or shares. 
 
Be mindful that your company cannot pay out dividends unless it is making a profit and has also set aside funds for its corporation tax liability. 

Pension contributions 

Although not immediate cash – pension contributions offer a very tax-efficient way to withdraw funds from your company whilst providing yourself with a future income once you have retired. 
 
For the 2021/2022 tax year, the maximum pension allowance is £40,000 before incurring any income tax. 
 
The company would need to make this contribution directly into your pension scheme – as an employer pension. If it does so, not only do you (personally) not pay any Income (Personal) Tax on that withdrawal, but the company also benefits from this being treated as a tax-deductible expense. This means that the amount contributed is deducted from the company profit before Corporation Tax is calculated. Based on the current rate of Corporation Tax, this means saving at a rate of 19%. 
 
It’s WIN, WIN! 

Director’s loan 

This method of getting money from your company needs to be handled with care but is a useful way of funding short term needs in a low-cost or interest-free way. 
 
When arranging a loan from your company into your personal account, you must maintain records on your company balance sheet and include them in your company tax return. If the amount borrowed is over £10,000 it will be subject to tax at the rate set by HMRC. 
 
Please note that overdrawn director’s loans can cause issues if your company becomes insolvent. 
 
I have written several blogs on Directors’ loans – and these contain a great deal more detail – please see here. 

Private Investment 

Investing your company profits into a start-up or another company can give you another source of tax-efficient income, you can earn dividends as a shareholder in that business. 
 
Think carefully about what type of company you invest in, as investing in an Enterprise Investment Scheme or Venture Capital Trust could earn you tax credits or reduce your personal tax bill. 

Effective Accounting Tips 

If your spouse or civil partner does not have a source of income, you can pay them a salary from your business, or dividends if they are a shareholder. This can maximize the amount of tax-efficient money you can get from your company by using their tax-free personal allowance or basic rate band. See my blog on paying dividends to family members here. 
If you repay your director’s loan within nine months and one day of the company accounts reference date, you will not have to pay any tax on the loan. 
Paying yourself a salary will ensure your income tax and NI contributions are paid monthly via PAYE. However, we recommend that you put aside enough each month to cover your annual corporation tax bill. 
Although we recommend paying for all business expenses directly from the company bank account, don’t forget to reimburse yourself for any legitimate expenses you incur on behalf of your business as this is effectively tax-free money to you. 
Unsure what your next steps are? Contact us today to help plan your finances to help keep your business secure. 
 
 
 
 
 
Written by: 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
Click on this text to edit it. 
Share this post:
 
I couldn't recommend them highly enough and will continue to use them for Spiral Static and all future ventures! 
 
 
Matt Badley | Spiral Static 
 
 
 
I have found their help in modernising my accounts invaluable and would recommend them to anyone in a heartbeat. 
 
Matthew Finch | Trailer Aid Ltd 
 
 
 
The whole team at effective accounting are exceptional.  
 
 
 
Jennifer Duthie | Skribbies Ltd 
 
 
 
Nicola is one of the most adept and accessible accountants that I have ever had the pleasure of working with.  
 
 
Carter Stewart | Transworld Consulting Ltd 
 
 
Choosing Effective Accountants has been one of the best decisions we made when we started our company. 
 
 
Matthias Geeroms | OTA Insight Ltd 
 
 
 
Nicola and the team have proven to be extremely professional, efficient and always on hand to answer any questions I have (and I have a lot!).  
 
Emily Hodges | EM Hodges Ltd 
 
 
 
I find the service to be prompt, professional and friendly. 
 
 
 
Simon Weightman | Mercury TS Ltd 
 
 
 
They are quick to respond and are always ahead of the curve for us. Keep it up and thank you. 
 
 
Freda McMahon | Lobster Noodle Ltd 
 
 
Our site uses cookies. For more information, see our cookie policy. Accept cookies and close
Reject cookies Manage settings