The company’s money is not your money. A limited company is a separate legal person, and there are only four routes by which its cash can legitimately become yours — salary, dividends, a director’s loan, and a pension contribution. Everything else is one of those four wearing a different label, or it is a problem.
Each is taxed completely differently. Here is the comparison, then the detail on each.
The comparison
| Route | Reduces Corporation Tax? | Employer NIC | Employee NIC | Personal tax | Main constraint |
|---|---|---|---|---|---|
| Salary | Yes — deductible | 15% above £5,000 | 8% from £12,570 to £50,270, then 2% | 20% / 40% / 45% | Must be commercially justifiable; RTI payroll required |
| Dividend | No — paid from post-tax profit | None | None | 10.75% / 35.75% / 39.35% above a £500 allowance | Distributable profits must exist |
| Director’s loan | No | Class 1A at 15% on a beneficial loan over £10,000 | None if repaid in time | None if repaid in time | s455 at 35.75% if unrepaid after 9 months and 1 day; P11D benefit in kind above £10,000 |
| Employer pension contribution | Yes — deductible | None | None | None on the contribution itself | £60,000 annual allowance; locked until 55, rising to 57 from 6 April 2028 |
| Expense reimbursement | Yes — deductible | None | None | None | Must be wholly and exclusively for the business |
1. Salary
Salary is the only route that builds a National Insurance record, and the only one that works when the company has no profit.
It reduces Corporation Tax — 19% on profits up to £50,000, an effective 26.5% between £50,000 and £250,000, and 25% above that. The employer National Insurance on it is deductible too.
The costs are real. Employer National Insurance runs at 15% above the £5,000 secondary threshold — £1,135.50 on a £12,570 salary. Employee National Insurance is 8% between £12,570 and £50,270, then 2%. Income tax at 20%, 40% and 45% on top.
Two thresholds are worth knowing:
- £6,708 — the Lower Earnings Limit. A salary at or above this protects a qualifying year for the State Pension even though no National Insurance is actually paid.
- £12,570 — the Personal Allowance and the primary threshold. Below this there is no income tax and no employee National Insurance.
Salary also means real-time information payroll: a submission to HMRC on or before every pay date, auto-enrolment assessment, payslips, a P60 and year-end returns — whether the salary is £5,000 or £50,000.
2. Dividends
Dividends are the cheapest route above the Personal Allowance, and the most constrained.
They attract no National Insurance at either end, and are taxed at 10.75% basic, 35.75% higher and 39.35% additional rate, with a £500 dividend allowance. The basic and higher rates rose two points on 6 April 2026 — a great deal of published advice still shows 8.75% and 33.75%.
The catch is that dividends are not deductible. They come out of profit that has already borne Corporation Tax, so the same pound is taxed twice: once in the company, once in your hands.
And you can only pay them out of distributable profits — accumulated realised profits less accumulated realised losses, measured from incorporation, after Corporation Tax. Not cash in the bank, and not this year’s profit alone. A dividend paid without sufficient reserves is unlawful, the shareholder can be required to repay it, and HMRC can treat it as a director’s loan instead.
Paperwork: a board minute for an interim dividend, and a dividend voucher for each shareholder.
3. Director’s loan
Taking money that is not salary, dividend or expense reimbursement makes it a loan.
There is no tax on borrowing from your own company — provided it goes back. Repay within nine months and one day of the accounting period end and nothing is charged. Miss that and the company pays a section 455 charge:
| When the loan was made | s455 rate |
|---|---|
| On or after 6 April 2026 | 35.75% |
| 6 April 2022 to 5 April 2026 | 33.75% |
The rate is fixed by when the loan arose, not when the deadline falls. It is reported on form CT600A and reclaimable once the loan is repaid, written off or released — but interest charged in the meantime is not.
Separately, if you owe more than £10,000 at any point in the tax year, the loan is a beneficial loan: reported on form P11D, with Class 1A National Insurance at 15% payable by the company and a personal reporting obligation for the director.
Do not confuse that with a write-off. Class 1 National Insurance through payroll applies where the company writes off or releases the loan — the amount written off is treated as earnings and goes through the payroll. An outstanding loan you still owe is a P11D benefit with Class 1A; a loan you no longer have to repay is Class 1.
A director’s loan is a timing tool, not an extraction route. It works for a short-term cash need, not for taking profit out.
4. Employer pension contribution
The genuinely underused one, and the arithmetic is not close.
An employer contribution to a registered pension scheme is:
- Deductible for Corporation Tax, subject to the wholly and exclusively test
- Free of employer National Insurance — unlike salary
- Free of employee National Insurance and income tax at the point of contribution
- Not restricted by your salary, unlike personal contributions, which are capped at your relevant UK earnings
The annual allowance is £60,000, with up to three years of unused allowance carried forward. It tapers where threshold income exceeds £200,000 and adjusted income exceeds £260,000.
Compare the routes on £1,000 of pre-tax company profit. Corporation Tax at 19%, Personal Allowance and dividend allowance already used, pension drawn later at the same marginal rate with 25% taken tax-free.
| Route, from £1,000 of pre-tax profit | Basic rate taxpayer | Higher rate taxpayer |
|---|---|---|
| Employer pension contribution (value on drawdown) | £850 | £700 |
| Dividend | £723 | £520 |
| Salary | £626 | £504 |
For a higher-rate taxpayer the pension delivers roughly 35% more than a dividend from the same profit.
The trade-offs are real:
- The money is locked in. No access until 55, rising to 57 from 6 April 2028.
- Relief is given when the contribution is paid, not when it is accrued. A contribution accrued at the year end but paid afterwards falls into the next accounting period.
- Relief can be spread forward. FA 2004 s197 requires the deduction to be spread over up to four chargeable periods, broadly where contributions paid in a period exceed 210% of those paid in the previous period. Two limits keep it off most owner-managed companies: the excess over 110% of the previous period must be £500,000 or more, and where nothing was paid in the previous period at all — a genuine first contribution — spreading does not apply. It is the step-change in year two or three that catches people, not year one. HMRC’s guidance is at CTM08345 and PTM043400.
- The 25% tax-free element is capped. The lump sum allowance is £268,275.
- It has to be wholly and exclusively for the trade. HMRC’s guidance accepts contributions for a director of a close company where the total remuneration package is comparable with what an unconnected employee doing similar work would receive. A £60,000 contribution for a spouse who does two hours a week will not survive that test.
Honourable mention: expense reimbursement
Not really “taking money out” — the company is repaying you for something you paid on its behalf — but it leaves the company untaxed, and it is routinely under-claimed.
The test is that the cost was incurred wholly and exclusively for the business. Common ones:
- Business mileage in your own car at the approved rates. GOV.UK sets them out separately for the two purposes: for tax purposes, 55p for the first 10,000 business miles, then 25p; for National Insurance purposes, 55p for all business miles. The 55p rate is not merely announced — it is enacted. The Taxation (Energy and Vehicles) Act 2026 (c. 26), s.2 substitutes 55p for 45p in ITEPA 2003 s.230(2), with effect for 2026/27 onwards. Anything quoting 45p for 2026/27 is out of date.
- Homeworking at £6 a week or £26 a month, without needing receipts.
- Annual staff function up to £150 per head.
- Trivial benefits up to £50 each, capped at £300 a year for a director of a close company.
Keep the receipts. Individually small, they add up.
What most owner-managers actually do
A modest salary, dividends for the balance, expenses claimed properly, and a pension contribution in the years when profit allows it. The loan account exists but is kept near zero and cleared before the nine-month deadline.
The mistake is rarely choosing the wrong route. It is drifting — money leaving the bank account with no decision attached, coded to the loan account, then reclassified as a dividend at the year end without anyone checking the reserves.
Frequently asked questions
What are the ways to take money out of a limited company?
Four: salary, dividends, a director’s loan and an employer pension contribution. Expense reimbursement is a fifth route in practice, though it is repayment of costs you incurred for the company rather than profit extraction. Anything else is one of those four under a different name.
Is it better to take salary or dividends?
Usually both. Salary up to the £12,570 Personal Allowance is efficient even with employer National Insurance at 15% above £5,000, because it is deductible for Corporation Tax and attracts no income tax or employee National Insurance at that level. Above the Personal Allowance dividends are cheaper, at 10.75% rather than 20% plus 8% employee National Insurance.
Are employer pension contributions really more tax-efficient?
Yes, by a wide margin. An employer contribution is deductible for Corporation Tax and carries no National Insurance at either end. From £1,000 of pre-tax profit a higher-rate taxpayer gets about £700 of value through a pension against £520 as a dividend or £504 as salary. The trade-off is access — the money is locked until age 55, rising to 57 from 6 April 2028.
How much can I put into a pension through my company?
The annual allowance is £60,000, with up to three years of unused allowance carried forward. It tapers where your threshold income exceeds £200,000 and your adjusted income exceeds £260,000. The contribution must also satisfy the wholly and exclusively test — it has to be justifiable as part of a commercially reasonable remuneration package.
What happens if I take money out without deciding what it is?
It defaults to a director’s loan. If it is still outstanding nine months and one day after the accounting period end, the company pays a section 455 charge — 35.75% for loans made on or after 6 April 2026, 33.75% for those made between 6 April 2022 and 5 April 2026. If the balance exceeds £10,000 at any point in the year it is also a beneficial loan, reported on form P11D with Class 1A National Insurance at 15% payable by the company. Class 1 National Insurance through payroll applies only where the loan is written off.
Getting the salary route running properly
Three of the four routes are decisions made once or twice a year. Salary is not — it is a submission to HMRC on or before every pay date, with auto-enrolment assessments, payslips and year-end returns behind it, and it is the route most likely to generate a penalty if it slips.
SmartFiling runs RTI payroll from £15 per employee per month, including auto-enrolment, payslips, P60s and year-end returns. Every client’s work is reviewed by an ICAEW Chartered Accountant, and the whole process is online.
