Are you running a business in the UK and wondering how to withdraw money in the most beneficial way? Extracting profits from a company for owners of LTD companies usually happens in two ways—either as a director’s salary or as dividends.
Extracting Profits from the Company: Salary
The salary of an LTD company director is paid monthly or weekly, and tax is deducted from this amount.
For the year 2022/2023, the tax-free allowance is £12,570. If your monthly salary is £1,048 or less, you won’t have to worry about taxes, but you’re still required to pay National Insurance contributions. If your income exceeds this threshold, you’ll be obligated to pay tax:
- 20% on earnings between £12,571 and £50,270,
- 40% on earnings between £50,271 and £150,000,
- 45% on earnings over £150,000.
If your annual salary exceeds £9,100, you must pay 15.05% for your National Insurance (NI).
Therefore, the most tax-efficient salary would be £658 per month. At this amount, you won’t have to pay NI contributions or taxes.
Extracting Profits from the Company: Dividends
Extracting profits from the company in the form of dividends is reserved only for shareholders in an LTD company. A director can receive dividends too but only if they are also a shareholder. Whether dividends are paid and their amount must be jointly decided by all shareholders—unless you are both the sole shareholder and director of your company, in which case you can decide on your own.
To avoid taxes, the dividends should not exceed £2,000 per year.
Higher dividends mean higher income, which requires paying more taxes, calculated through Self Assessment:
- Up to £50,000 per year: 7.5%, increasing to 8.75% in the 2022/2023 tax year,
- £50,000–£150,000: 32.5%, increasing to 33.75% in the 2022/2023 tax year,
- Over £150,000: 38.1%, increasing to 39.35% in the 2022/2023 tax year.
Pension Contributions
As a UK taxpayer, any pension contributions you make to your retirement plan are eligible for tax relief.
If you are in the higher tax brackets (40% or 45%), such contributions become even more effective.
Under tax law, you can contribute up to 100% of your earnings to your pension plan, but the amount cannot exceed £40,000 per year.
For every £100 you contribute to your pension plan, the UK government gives you a tax relief worth at least £25.
One of the rules of pension investment is that no funds can be withdrawn before the age of 55 unless you are retiring early due to ill health.
Seek Professional Help to Extract Profits from Your Company in the Most Beneficial Way!
A Personal Pension Plan (PPP) or a Self Invested Pension Plan (SIPP) opens the door to smart investing and legally reducing taxes, but it’s wise to seek professional tax advice to avoid making any mistakes.
If you’re still wondering which method of extracting profits from your company will be the most efficient, be sure to consult with us and get a tailored plan designed specifically for you.
