This is arguably the most frequently asked question we receive from owner-managed business clients. While the answer was once straightforward—take a salary up to your personal allowance and extract the remainder as dividends—today’s tax landscape requires a more nuanced approach.

Why There’s No One-Size-Fits-All Answer

The honest truth is that without performing individualised calculations, the most accurate answer we can provide is: “It depends.” The tax system has evolved, and what works best for one business owner may not be optimal for another.

When Salary Should Take Priority

If you need to draw a market-rate salary for commercial reasons—such as securing personal finance or making pension contributions—this should be your starting point rather than tax efficiency alone.

Key Factors That Determine Your Optimal Strategy

Your most tax-efficient extraction method depends on several interconnected factors:

Company-specific considerations:

• Your company’s profit level, which determines the corporation tax rate
• The number of director-shareholders involved
• Available distributable reserves

Personal circumstances:

• Your other income sources, affecting your marginal tax rate and available Personal Allowance
• Your age—those 66 and over don’t pay employee National Insurance contributions
• Your actual cash requirements for living expenses

Employment Allowance availability:

• The £10,500 Employment Allowance may not be available to your company, or it might already be used by other employees’ salaries.

The Cash Flow Consideration

Extracting every available pound from your company typically results in higher tax costs than withdrawing only what you need for living expenses. Money left in the company avoids income tax until extracted, and you might benefit from Capital Gains Tax treatment (potentially with Business Asset Disposal Relief) if you eventually sell or liquidate the company.

The ‘Classic’ Model Still Works for Many

For numerous director-shareholders, the traditional approach remains effective: take a salary equal to the £12,570 personal allowance, then extract dividends to cover living costs. However, as outlined above, many factors can alter this calculation.

Getting Personalised Advice

Given the complexity of modern tax planning, we recommend discussing your specific profit extraction strategy with us. Every business situation is unique, and a tailored approach will ensure you’re making the most tax-efficient decisions for your circumstances.

These articles are for guidance only and professional advice should be obtained before acting on any information contained in them.

No responsibility can be accepted for loss occasioned howsoever to any person as a result of action taken or refrained from as a result of reading.