How Company Owners Can Extract Profits Tax-Efficiently in 2026/27

If you run a limited company, one of the most common questions is: “What is the most tax-efficient way to take money out of my company?”

The truth is that there is no single strategy that works for everyone.

The most tax-efficient approach depends on several factors, including:

• The type of business you run

• The level of profits available

• Your company structure

• Whether family members are shareholders

• Your personal income and tax position

• Your future plans for the business

Because of this, profit extraction should always be considered as part of a wider tax strategy, not as a one-size-fits-all formula.

However, there are some common principles that often apply to small owner-managed companies.

The Typical Approach for Small Limited Companies

For many small companies with a single director-shareholder, the most tax-efficient structure often involves a combination of:

• A modest salary

• Tax-efficient benefits

• Dividends

This approach usually works well because:

• Salary reduces the company’s taxable profits.

• Dividends are not subject to National Insurance.

• Benefits can sometimes be provided tax-free or at a low tax cost.

But the correct balance must always be calculated based on the individual circumstances.

Setting the Right Level of Salary

Even if most income is taken as dividends, it is usually advisable to take a small salary.

This is important because it helps maintain entitlement to the State Pension and other benefits.

For the 2026/27 tax year:

• Lower Earnings Limit (LEL): £6,708

• Primary Threshold: £12,570

• Employer NIC threshold: £5,000

Paying a salary above the Lower Earnings Limit ensures that the year counts towards your State Pension record.

However, if the salary exceeds certain thresholds, National Insurance contributions may become payable, so careful planning is required.

A company with only one director and no other employees normally cannot claim the Employment Allowance, which can affect the optimal salary level.

Dividends: A Common Way to Extract Profits

Dividends are often used by company owners because they are not subject to National Insurance.

However, dividends can only be paid if the company has sufficient distributable profits after Corporation Tax.

For the 2026/27 tax year:

• The first £500 of dividend income is tax-free

• After that, dividends are taxed at:

Tax band	Dividend tax rate
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

Dividends must also be properly declared and documented, including board minutes and dividend vouchers.

Why Dividends Are Not Always the Best Option

While dividends are tax-efficient in many cases, they are not always the best solution.

For example, if your company is claiming Research & Development (R&D) tax relief, a higher salary may sometimes be more beneficial because:

• Staff costs form part of the qualifying expenditure.

• PAYE liabilities may affect eligibility for certain reliefs.

This means that in some cases, paying a higher salary can actually increase tax relief for the company.

Other Ways to Take Money from Your Company

Dividends and salary are not the only options. Company owners can extract value in several different ways.

Bonuses or additional salary

Additional remuneration may be paid to directors or employees, including family members where appropriate.

Pension contributions

Employer pension contributions are often very tax efficient.

The company can normally claim tax relief, and the contribution does not trigger Income Tax or National Insurance for the individual.

For 2026/27:

• The annual pension allowance is £60,000 (subject to tapering for high earners).

Benefits in Kind

Some benefits can be provided tax-free or at a low tax cost, such as:

• Electric cars or vans

• Mobile phones

• Workplace parking

• Staff parties (up to £150 per year)

• Trivial benefits (up to £300 per year for directors)

• Pension advice (up to £500)

• Home working allowance (£6 per week)

Interest on money lent to the company

If you have personally loaned money to your company, the company may pay you interest.

This can make use of the personal savings allowance, which for 2026/27 is:

• £1,000 for basic rate taxpayers

• £500 for higher rate taxpayers

• £0 for additional rate taxpayers

The company can also receive tax relief on the interest paid, provided certain conditions are met.

Using Family Members in the Business

For family-owned companies, it may be possible to share income across family members.

Examples include:

• Paying a salary to a spouse who works in the business

• Issuing shares to family members

• Paying dividends to multiple shareholders

This can help make better use of multiple tax allowances and lower tax bands.

However, the rules must be followed carefully. For example:

• Salaries must reflect the actual work performed.

• Anti-avoidance rules apply to some income-splitting arrangements.

• Gifts of shares may have Capital Gains Tax implications.

Professional advice is important before making these changes.

Retaining Profits in the Company

Sometimes the most tax-efficient decision is not to extract profits immediately.

Leaving profits in the company can help:

• Avoid higher personal tax rates

• Avoid losing the personal allowance (income above £100,000)

• Avoid the High Income Child Benefit Charge

However, large cash balances inside a company can sometimes affect eligibility for certain tax reliefs if the business is later sold.

Extracting Capital Instead of Income

In some situations, company owners may extract value through capital transactions rather than income.

Examples include:

• Selling shares to a third party

• A management buy-out

• Selling to an Employee Ownership Trust

• A company buyback of shares

• Liquidation or striking off a company

Capital treatment may result in Capital Gains Tax rather than Income Tax, which can sometimes be more favourable.

For example, Business Asset Disposal Relief can apply to qualifying disposals.

However, anti-avoidance rules such as Transactions in Securities and Targeted Anti-Avoidance Rules (TAAR) must always be considered.

Director Loans

Another short-term option is taking a loan from the company.

However, if the loan is not repaid within nine months after the company’s year end, the company may have to pay Section 455 tax.

From 6 April 2026, the rate increases to 35.75%.

Although this tax is refundable when the loan is repaid, it can create cash flow issues.

Charging Rent to the Company

If you run your company from home, it may be possible to charge the company rent for using part of your property.

This can allow:

• The company to claim tax relief on the rent

• The director to offset certain household costs

However, the arrangement must be carefully structured to avoid affecting Capital Gains Tax relief on the main residence.

The Key Point: Profit Extraction Should Be Planned

The most tax-efficient mix of salary, dividends, benefits and other payments varies for every business owner.

What works for one company may not work for another.

This is why tax planning before the financial year end is so important. It gives you the opportunity to:

• Review profits and projections

• Adjust remuneration

• Use available allowances and reliefs

• Plan ahead for personal tax liabilities

For many owner-managed companies, a combination of a modest salary and dividends remains an effective strategy in 2026/27.

However, the best solution always depends on the specific circumstances of the business and its owners.

Careful planning can help ensure that profits are extracted in the most tax-efficient way while remaining fully compliant with HMRC rules.