Key Takeaways
- Your limited company’s profits belong to the business, not to you personally, so you need to extract them through specific legitimate methods: salary, dividends, pension contributions, or a combination.
- A salary at the Primary Threshold of £12,570 is usually the starting point for directors, but single-director companies without other employees cannot claim Employment Allowance and may benefit from a lower salary.
- Dividends are not subject to National Insurance and are taxed at rates as low as 10.75% in the basic rate band (from 6 April 2026).
- Employer pension contributions are often one of the most tax-efficient ways to take value from a company: they are usually deductible for Corporation Tax if they meet the “wholly and exclusively” test, and there is no Income Tax or NIC on the contribution itself, subject to the annual allowance of £60,000
- Directors with adjusted income above £100,000 face a 60% effective marginal rate due to personal allowance withdrawal. This is called the 100k tax trap in plain terms.
Table of contents
1. What profit extraction actually means
When you run a limited company, the business is a separate legal entity.
The profits belong to the company, not to you personally. You cannot simply transfer money from the company account to your own whenever you feel like it. What you can do is extract those profits through specific, legitimate methods.
Profit extraction is the process of deciding
- how,
- when, and
- in what form
you take money out of your company.
Done well, it keeps your overall tax liability low for both you and the business.
Done badly, it means paying more than you need to… sometimes a lot more!
There are several recognised ways to extract profits from a limited company:
- salary,
- dividends,
- employer pension contributions,
- director’s loans, and
- benefits in kind.
Most directors use a combination of these, and the optimal mix depends on your profit level, your personal tax position, and your plans for the business.
2. Taking a salary from your limited company
Paying yourself a salary is the most straightforward way to extract money from your company. The business deducts your salary from its taxable profits, which reduces its corporation tax bill. You receive the money through PAYE, and it counts as earned income.
The downside is that salary above certain thresholds triggers National Insurance: both from you as the employee and from the company as the employer. That employer NIC cost is a real reduction in what is available to distribute, so the salary level needs to be chosen carefully.
Setting the Right Salary Level
For 2026/27, the key NI thresholds are the Lower Earnings Limit (LEL) at £6,708, the Primary Threshold at £12,570, and the Secondary Threshold (where employer NIC begins) at £5,000.
The LEL is the minimum salary needed to earn a qualifying year for the state pension without actually paying any NI. The Primary Threshold is where employee NI kicks in at 8%. The Secondary Threshold is where the company starts paying employer NI at 15%.
For most directors, the starting point is a salary set at the Primary Threshold of £12,570.
The Employment Allowance Exception
The Employment Allowance lets eligible companies offset up to £10,500 of employer NIC each year.
If you qualify, you can pay yourself a salary up to the Primary Threshold without the company incurring employer NIC costs. The catch is that single-director companies with no other employees are not eligible for the Employment Allowance.
This is one of the most commonly misunderstood rules in small company tax planning.
If you are the sole director-shareholder with no other staff on the payroll, you cannot claim it, and things get a bit more complicated. If you need help, feel free to contact WallsMan Creative: we’re here to help, and we’re accountants who actually get your niche!
3. Paying yourself through dividends
Dividends are the most common way for director-shareholders to extract company profits, and for good reason.
They are not subject to National Insurance: neither employee nor employer NIC applies. This makes them cheaper than salary at most income levels, and they form the second pillar of the standard extraction structure for the majority of small company directors.
Dividends are paid from the company’s post-corporation-tax profits.
You cannot pay dividends if the company does not have sufficient distributable reserves. (Doing so would make the dividend unlawful and could expose you to personal liability.)
Corporation Tax is 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between.
4. Making Employer Pension Contributions
Employer pension contributions are, pound for pound, the most tax-efficient way to extract profits from a limited company… yet they remain underused.
When your company makes an Employer Pension Contribution to your personal pension, the payment is deductible for Corporation Tax purposes – if it satisfies the “wholly and exclusively” test.
That means a £10,000 pension contribution saves the company up to £2,500 in Corporation Tax if it pays at the 25% main rate, or £1,900 at the 19% small profits rate.
The Annual Allowance and carry forward
The annual pension allowance for 2026/27 is £60,000, though it tapers for high earners with threshold income above £200,000 and adjusted income above £260,000. This is the total amount that can be paid into all registered pension schemes in a tax year without a tax charge arising.
If you have not used your full annual allowance in the previous three tax years, you can carry the unused amount forward and potentially make a much larger contribution in the current year.
Note: Employer pension contributions need to be commercially justifiable and made wholly and exclusively for the business to get Corporation Tax relief. HMRC may question unusually large contributions, so it’s sensible to keep brief records showing the business reason and your role.
5. Taking a director’s loan
A director’s loan allows you to borrow money from your company without it being treated as salary or a dividend. When it works well, it gives you access to funds in one tax year that you can then clear with a dividend in the next.
The rules are strict, though.
If a director’s loan is not repaid within nine months of the company’s year‑end, the company must pay Section 455 tax at 35.75% on the outstanding amount (from 6 April 2026).
This tax is refundable once the loan is repaid, but it creates a real cash‑flow cost. Director’s loans should be a short‑term bridge, not a regular way to take money out; if you keep using them, your salary and dividend setup probably needs a review!
6. Benefits in kind and business expenses
Benefits in kind are a small but still useful part of most directors’ extraction strategies. When tax‑free or low‑tax, they can deliver value more cheaply than extra dividends.
The 2026/27 benefits in kind you have to know about:
- Electric cars: Very low benefit‑in‑kind rate (3% of list price for zero‑emission cars).
- Mobile phone: One phone per director is fully tax‑free.
- Trivial benefits: Up to £50 per item, £300 per director per year, tax‑free.
- Staff entertainment: Up to £150 per person per event, if available to all employees.
- Pension advice: Up to £500 per employee, tax‑free.
- Home‑working allowance: £6 per week, tax‑free without receipts.
7. Combining methods: the approach that works for most directors
No single method of profit extraction is optimal in isolation. The most tax-efficient outcome comes from combining salary, dividends, and pension contributions in a way that is tailored to your income level, your company’s profits, and your personal financial goals.
Profit extraction is not a one-size-fits-all exercise.
If you’d like to work through what the right combination looks like for your company and personal circumstances, WallsMan Creative specialises in accountancy for the creative industries.
We work with freelancers, limited company directors, and agency owners across the UK, and tax-efficient profit extraction is one of the core conversations we have with our clients every year. Reach out, talk to an accountant who gets you!
