If you have a company, and it has made you money, then you will eventually want to take that money out – to spend or when you close/sell your business.

1. Expenses & Benefits

There are many rules on what HMRC consider tax free expenses and benefits for employees.  Do make sure you take advantage of these opportunities, regularly.  We offer generic guidance but do ask so these may be tailored to you, your business, and your family e.g. one mobile phone per employee and staff training.

Remember that it is your company, and HMRC only asks that costs are reasonable in the context of your business so feel free to splash out on the variations or enhancement you desire – the tax man is not going to complain if you spend extra on first class travel, or a special colour version of that gadget you need.

Do not forget the generous tax-free pension savings opportunities for contributions paid direct from the company.

Some benefits are taxable but can also be very tax efficient e.g. a company van, an electric car, or a loan from the company, so do explore these too.

2. Wages

Wages are paid for work done – so may vary per member of staff.  They must cover the minimum wage for expected hours of work unless that staff member is a director with no contract.

Wages are paid out before corporation tax is assessed, so only suffer payroll taxes, deducted by the company before receipt by the employee.

Wages reduce profits subject to corporation tax and can create losses.  If the company has not got current year profits, then losses may be carried back one year (or up to 3 years if it is the final year of the business), or forward to offset future profits.

Wages pay payroll taxes instead of corporation tax as follows: –

• Income tax – which is dependent on other income, at 0%, 20%, 40% or 45%.
• Employers’ national insurance at 0%, or 15%
• Employees national insurance 0%, 8% or 2% (excluding pensioners)

Employers’ national insurance can be cancelled out by the £10,000 employment allowance, if your company has at least one employee or two directors on the payroll eligible to pay employer national insurance.

National insurance is based on wages paid each payday in each employment – weekly or monthly for employees but annually for Directors.

Employers National insurance is paid on wages in excess of £416pm/£5,000pa.

Employees National insurance is paid at the higher rate on wages in excess of £1,047pm/£12,570 pa and at the lower rate on wages in excess of £4,189pm/£50,270pa.

Hence to declare wages up to the national insurance threshold, and hence to just pay income tax at 0%, 20%, 40% or 45% (no national insurance) can be a good idea.

3. Dividends

Firstly dividends are paid out of post tax profits, if you have not earned profits, then you can not pay dividends.  That is profits after corporation tax.

Dividends are declared by directors per class of shares e.g. dividends to holders of ordinary shares; and paid to shareholders, in proportion to the number of shares held.

Once in the hands of the shareholder then dividends may be subject to personal tax too, on the net received – usually collected via a personal tax return.

Corporation Tax rates – If profits are below £50,000 then corporation tax is 19%, if over £250,000 then 25%.  If profits are between these thresholds, then the first £50,000 of profits pay 19% and the balance 26.5%.  But beware if you have two or more associated companies then these thresholds are shared equally between them.  Additionally, this is total profits not just taxable profits i.e. includes dividends from other companies.

Personal tax on Dividends – Everyone currently has a minimum £500 allowance before paying personal tax on dividends, but above this the extra personal tax will depend on the tax band in which dividends fall for that individual – and they are at the top of the pile.  Currently 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers

Hence income extracted as dividends will pay corporation tax based on company profit levels plus personal income tax based on personal income levels.

In conclusion the wages vs dividends decision can be complicated, and needs to be visited for every individual and their company.

4. Directors Loans

If you take money from your company and do not say what it is for, then it will be treated as a loan, awaiting repayment.

Similarly if you take an advance on expense etc.

Alternatively you may choose to take a loan from your company instead of from a bank.  If so then you need to know the rules.

A loan to a director or employee, in excess of £10,000 is considered a benefit in kind if interest is not charged/paid at a rate that is as least the official rate – currently 3.75%.

If this interest is not paid, then the notional unpaid interest must be declared to HMRC as a benefit in kind by 6th July.

Please note that all loans to directors and other participators e.g. shareholders, must be declared in the notes to the company accounts so HMRC will find out about it.

And loans not repaid within 9 months of the company year end trigger a tax charge on the company of 33.75%. – which much be reported in the corporation tax return and paid with the corporation tax.  This tax is eventually refundable when the loan is truly repaid but there are lots of anti avoidance rules to negotiate.

If you lend money to the company then you can charge interest, if the company required such a loan, and the interest is justifiable.  Such interest is taxable, and should be paid net of tax i.e. the company needs to deduct tax before paying such interest and pay it over to HMRC.

5. Leave the money in the company

If money is left in the company, then it will firstly pay corporation tax in the usual way as above in the year profits are made but may then sit around incurring no further taxes.

Leaving cash in the company temporarily, in order to enjoy better tax rates on withdrawal next tax year can also be a good idea.

Long term however we are reliant on the rates and allowances then applicable for withdrawal, and tax rates appear to be rising.

Under £25,000 may be eligible for capital gains treatment on company closure, but more than this and it will be treated as dividends, unless a formal costly insolvency procedure is undertaken (not worth it unless sums involved exceed £100,000)

Each person has a capital gains tax allowance of £3,000 after which gains are subject to tax – 18% if you have any basic rate tax band left otherwise 24%.  However, if your gains qualify then there is also a £1m Business Asset Disposal relief lifetime allowance where gains only pay 14% tax – an effective extraction tax rate of 30.34% to 36.79%. (set to rise to 18% on 5^th April 2026 with anti forestalling rules coming into force)

Alternatively you may sell your company and hence achieve a capital gain – although purchasers seldom want to purchase surplus cash.

If you should die, then the shares may be tax free as business property (but that is now being limited).  And if there is a lot of surplus cash or investments then it may not qualify and hence could be subject to inheritance tax at 40%.  Whoever inherits the shares will also inherit the problem of extracting the cash.

So take your money at the lowest taxes today