Are you working for your business, or are you working for your business?
Many business owners lose thousands of pounds each year — not through poor sales or bad investments, but simply through inefficient profit extraction.
Profit extraction isn’t just about taking a salary or dividends. Done right, it’s a powerful way to build long-term wealth, cut your tax bill and secure your financial future. It’s not just how much you take; it’s when and how you take it.
A good will tailor your arrangements to your circumstances, aligning both your personal and business goals.
Here’s what you know
The most common profit extraction method is through salary, dividends, or both.
Paying yourself a salary through PAYE is the simplest option. It helps secure your State Pension, provides a steady income and is deductible for Corporation Tax.
But there’s a downside. Salaries are taxed at 20%, 40%, or even 45%, and employers pay an extra 15% National Insurance (NI). While it’s stable, the cost of taking a salary needs careful consideration.
Dividends are another popular choice. The advantage? They’re taxed at lower rates than salary, being 8.75%, 33.75%, 39.35% and attract no NI.
The catch: dividends can only come from retained profits that have already been taxed, and managing the timing of tax payments can be tricky. Planning ahead is essential, as many directors take dividends without factoring in the future tax bill, only to be caught short when payment is due.
Here’s what you may not know
Plan for cash flow around dividends. Take a dividend in May 2025, and the tax bill won’t hit until 31 January 2027. By then, the money’s often gone and forgotten. That delayed tax hit can drain personal or company reserves when you least expect it.
By contrast, salary tax is deducted at source and paid over to HMRC by the 22nd of the following month.
With the right planning, you can avoid nasty surprises. Your advisor should guide you every step of the way.
How much profit are you really taking out?
Comparing £50,000 in dividends to £50,000 in salary sounds simple, but it's like comparing apples and oranges.
Dividends come from profits that have already been taxed, while salary and employer NI contributions are tax-deductible. To pay a £50,000 dividend, your company needs around £66,667 in profit. For a £50,000 salary, only around £57,500 in profits is needed.
This changes the true cost of each option. To understand tax efficiency, compare equal amounts of profit, not just the payout.
Pension credits
Only take enough salary to qualify for your state pension if you still need more National Insurance years or you’re under state pension age. Check your number of qualifying years on your government personal tax account.
Employment allowance
Employers pay 15% NI on all earnings above £5,000. Many owner-managed businesses assume they will qualify for the £10,500 employment allowance, but single-director companies with no other employees can’t claim it.
Example: A director paying himself £50,000 incurs £6,750 in employer NI. If they hire a part-time worker for £2,000, they can reclaim the full NI bill, spending £2,000 to save almost £7,000. This strategy covers the cost of the part-time worker delivers significant savings.
Best practice
Profit extraction isn’t just a financial, it’s strategic. The most effective approach is blended and holistic, balancing short-term rewards with long-term planning.
- Minimise NICs and tax liabilities by combining salary, dividends and pension contributions.
- Think long-term: plan for future events like retirement, business sale or succession.
- Stay in control: planning ahead to protect your cash flow and avoid tax shocks.
- Work with your advisor to tailor a strategy that aligns with your goals and lifestyle.
Your next move
Choosing between salary and dividends isn’t just about the tax. Talk to Crowe about your priorities and make sure your profit extraction strategy works for you.
Reviewing your plan could be one of the most valuable decisions you make this year. In our next articles, we’ll explore other profit extraction methods and how to align them with your life goals.
For more information, please contact your usual Crowe contact.
Contact us
