Is there a smarter way to pay yourself from your business? For many business owners, their company isn’t just a passion, it’s a livelihood. When taking money out of the company, the goal is to keep as much of it in your pocket as possible. But it’s not just about the tax. There are several ways to extract profits, and the best option depends on where you are in your business journey. Let’s explore some of the most effective strategies and when they might work for you.
Salary and dividends
Most business owners are familiar with this approach, which is covered in detail in our previous Profit Extraction (Part 1) - Salary vs Dividends article.
Here are the key points
- Paying a salary triggers income tax on the employee and national insurance (NI) for both the employee and employer.
- Salary and employer NI is deductible from business profits, which lowers your corporation tax bill.
- A salary counts towards your state pension entitlement, but it’s taxed at higher tax rates than dividends.
- Dividends are paid out of post-tax income so are not deductible from taxable profits.
Pension contributions
Making pension contributions directly from your company is one of the most tax-efficient ways to extract value, and it’s popular for good reason.
- Contributions reduce your corporation tax as they’re deductible from profits.
- You won’t pay personal tax on them, and they’re exempt from benefit-in-kind rules.
- You can’t access the funds until you’re over 55.
- Exceeding your annual allowance may trigger tax charges, so consult your accountant before making large contributions.
Charging interest
If you’ve loaned money to your company, you can charge interest on the loan.
- Interest payments reduce your corporation tax as they’re deductible from profits.
- You’ll only pay income tax on the interest, not NI.
- You may avoid tax altogether if the interest falls within your savings allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate).
- The company must deduct tax at source and report it to HMRC quarterly.
Charging rent
If your company uses property you own, you can charge rent.
Rent payments reduce the company’s profits and lower its corporation tax. You’ll need to declare the rental income on your personal tax return, but you can offset it with related costs like maintenance or insurance.
This strategy lets you earn from existing assets while staying tax efficient.
Benefits and vouchers
Your company can provide perks that benefit you personally—without increasing your salary.
Tax-free benefits include:
- one mobile phone per employee
- bikes and safety gear via the cycle-to-work scheme
- trivial perks (up to £50 each, capped at £300 annually for directors).
Taxable but efficient benefits include:
- private medical insurance (taxable but avoids NI)
- electric or low-emission company cars (very tax-friendly)
- gym memberships (taxed as a benefit-in-kind but eligible for corporation tax relief).
These perks offer a smart way to reward yourself while keeping costs down.
Paying family members
You can pay family members for genuine work they do for your business.
- Their wages are tax-deductible if they perform real, necessary work.
- This strategy can use up their personal allowance (£12,570), shift income to a lower tax band, and build their state pension entitlement through NI contributions.
- Keep records of the work they do to support the deduction.
Share buyback
If you're planning to step back from the business, a share buyback can help you convert ownership into cash.
- The company buys back your shares, allowing you to extract value without taking a salary or dividend.
- You may qualify for Capital Gains Tax treatment, which can be more favourable than dividend tax.
- If eligible for Business Asset Disposal Relief (BADR), you could pay just 18% tax on the gain.
This method suits higher-rate taxpayers and family-run businesses that want to retain control.
Liquidation
When selling or passing on the business isn’t viable, liquidation may be the best option.
- The company stops trading, sells assets, collects debts, and pays creditors.
- Remaining post-tax cash goes to shareholders and is taxed as a capital gain.
- Capital Gains Tax rates (18–24%) are lower than income tax on salary or dividends.
- BADR may reduce the rate to 14% on up to £1 million of gains (until April 2026).
Taking a loan
You can borrow from your company, but it comes with conditions.
- Loans over £10,000 with low interest may trigger a benefit-in-kind tax charge.
- If unpaid nine months after the accounting period ends, the company pays a temporary 33.75% tax charge (refunded when repaid).
- The loan may appear in the company’s public accounts filed at Companies House.
Strategise your pay: What to do next
There are more ways to extract profit from your company than many owners realise. Each method has its advantages, especially when used as part of a strategic, long-term plan.
As we mentioned in our first article, it pays to think ahead. Choose the right mix based on your goals, and make sure your business has the cash and reserves to support your strategy, protecting working capital is just as important as extracting value.
In our next article, we’ll explore how strategic profit extraction across your lifetime can make a big difference and which methods to consider at each stage of your journey.
For more information, please contact your usual Crowe contact.
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