Accountants Chester – Tax Tip No. 58

As the end of the tax year approaches, it is prudent for those operating their business as a personal or family company to review the profits extracted so far in the tax year and to consider whether it is beneficial to take further profits before the end of the tax year.

There are various ways in which profits can be extracted, and not all routes are equal from a tax perspective. When extracting profits, it makes sense to do so as tax efficiently as possible, while meeting any non-tax considerations that may need to be taken into account. For example, while it may be tax efficient to pay a salary or dividend to a family member, there may be non-tax reasons for not doing so.

Option 1: Salary and bonuses

Where the personal allowance of £12,570 is available in full, it is tax efficient to pay a salary or bonus up to this level. As the personal allowance is equal to the primary Class 1 National Insurance threshold for 2023/24, there will be no employee National Insurance to pay. If the employment allowance is available, there will be no employer’s National Insurance to pay either. However, remember, personal companies where the sole employee is also a director are not entitled to the employment allowance. If the employment allowance is not available, employer’s National Insurance is payable at 13.8% on the excess over £9,100.

If you have not paid a salary or bonus of £12,570 yet this tax year and have the funds available to extract from your company, you may wish to consider paying the shortfall before 6 April 2024.

Option 2: Dividends

Dividends can only be paid from retained profits, and if you have sufficient retained profits, you may wish to pay a dividend before the end of the tax year, particularly if shareholders have not used their dividend allowance, which is £1,000 for 2023/24 and available to all taxpayers regardless of the rate at which they pay tax. The dividend allowance falls to £500 from 6 April 2024, so it may make sense to take dividends before that date if they would be tax-free in 2023/24 but taxed in 2024/25.

Remember, unless you have an alphabet share structure, dividends must be paid in proportion to shareholdings.

Option 3: Pension contributions

It can be very tax efficient for your company to make contributions to your pension scheme on your behalf, particularly if you have not used your annual allowance for the current year, or have unused allowances from the previous three years. The lifting of the lifetime allowance charge paves the way to make further contributions if your pension pot has reached £1,073,100. Your company is able to deduct the contributions in calculating its taxable profits.

Option 4: Benefits in kind

You can also take advantage of tax exemptions to extract profits in the form of tax-free benefits. For example, you can make use of the trivial benefits exemption to provide treats costing no more than £50. Remember, tax-free trivial benefits for company directors are capped at £300 per tax year.

Option 5: Do nothing

If you do not need to use your profits outside your company and would pay further tax on any profits extracted, you may prefer to leave them in your company for now. You also need to ensure that you have sufficient funds available in your business to meet your business costs.

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There are several ways to take profits out of a UK limited company. The most tax-efficient method depends on your unique situation. Here's an overview of the common methods:

  • Salary and Dividends: As a director, you can withdraw a salary (subject to income tax and National Insurance) and receive dividends from the company's profits (subject to dividend tax rates).

  • Director's Loan: Borrow money from the company. Be mindful of repayment terms and potential tax implications.

  • Pension Contributions: Use company profits to boost your pension fund, potentially benefiting from tax relief.

  • Expense Reimbursements: Claim legitimate business expenses from the company.

Important Considerations:

  • Tax Efficiency: Each method has different tax implications. For example, dividends often offer favourable tax rates compared to salary.
  • Company Needs: Ensure you retain sufficient funds within the company for growth and investment.
  • Legal Requirements: Understand and adhere to the legal requirements associated with each method.

Accountants Chester Can Help:

Accountants Chester specialise in advising businesses on optimal profit extraction strategies. They will:

  • Analyse Your Situation: Assess your individual circumstances and company finances.
  • Tailor a Plan: Develop a personalised plan maximising your tax advantages while minimising risks.
  • Ensure Legal Compliance: Help you navigate the complexities of company law and tax regulations.

Business Accountants Chester

There's no single "best" way to extract profits from a UK business, as the optimal approach depends on your individual circumstances. Here's why:

  • Business Structure: Sole traders, partnerships, and limited companies have different tax implications for profit extraction.
  • Tax Efficiency: Strategies like salary, dividends, pension contributions, and retaining profits all have varying tax impacts.
  • Personal Income: Your income level and tax bracket will influence which methods make the most sense financially.
  • Long-Term Goals: Do you want to reinvest profits into business growth, minimise your current tax burden, or plan for retirement?

Key Considerations:

  • Salary vs. Dividends: A common approach for limited companies, but the right balance depends on your situation.
  • Pension Contributions: Can be tax-efficient, especially for higher-rate taxpayers.
  • Retained Profits: Reinvesting in your business can foster growth but has tax implications if you later sell the business.

Important: This is a complex area. It's NOT advisable to make decisions on profit extraction based solely on general online information.

Best Practice: Consult Accountants Chester. They can:

  • Analyse your specific circumstances
  • Offer tailored advice for maximising your income while complying with tax regulations.
  • Help you develop a long-term profit extraction strategy aligned with your goals.

Remember: Tax rules are subject to change. An accountant will keep you up-to-date.

Business Accountants Chester

How do I take money out of my business? (UK 2023/24)

The most tax-efficient ways to withdraw money from your UK business depend on its legal structure:

Sole Trader

  • Drawings: As a sole trader, you can take money from your business profits whenever you need it. These drawings are considered personal income and taxed accordingly.

Limited Company

  • Salary: Pay yourself a regular salary subject to PAYE (Pay As You Earn) income tax and National Insurance deductions. This also builds your entitlement to certain state benefits.
  • Dividends: Distribute company profits to shareholders as dividends, taxed at dividend tax rates (often lower than income tax rates).
  • Director's Loan: Borrow money from the company, but it must be repaid within a specific timeframe to avoid additional tax implications.


  • Partnership Share: Partners receive a share of the profits subject to income tax, similar to sole traders.

Important Considerations:

  • Tax Efficiency: The best method will vary depending on your income level and the amount you wish to withdraw. Remember, corporation tax will already be paid on company profits before the remaining funds can be withdrawn.
  • Record Keeping: Maintain meticulous records of all withdrawals regardless of the method, as this is crucial for accurate tax filings.

Accountants Chester Can Help

Accountants Chester offer expertise in structuring your withdrawals for optimal tax efficiency. They can advise you on:

  • The right combination of withdrawals: Finding the best balance of salary, dividends, and other methods based on your personal and business circumstances.
  • Timing of withdrawals: Optimising tax implications by utilising different tax years and allowances.
  • Long-term financial planning: Aligning your withdrawals with your wider financial goals.

Don't make these mistakes:

  • Treating company money as your own: Mixing business and personal finances leads to tax issues and potential legal problems.
  • Ignoring National Insurance contributions: Ensure your salary level maintains your NI contributions and state benefit entitlements.

Business Accountants Chester

Profits in a UK private limited company have several options:

  • Retained Earnings: Profits can remain in the company to fund growth, cover future expenses, or serve as a buffer against difficult periods.
  • Dividends: Profits can be distributed to shareholders as dividends, subject to available reserves. Taxation of dividends depends on the shareholder's income tax bracket.
  • Bonuses or Increased Salaries: Companies may choose to reward directors and employees through bonuses or salary increases. This may have tax implications.
  • Corporation Tax: A private limited company must pay corporation tax on its profits. The current UK rate is 25%.

Important Note: The best use of profits depends on the company's specific goals and financial situation. Consulting a qualified Accountants Chester is highly recommended to create a plan that maximises benefits and ensures compliance with tax laws.

Why Choose Accountant Chester?

Chester-based accountants offer localised expertise on the UK tax system and can provide personalised advice for optimal profit utilisation within your business.

Business Accountants Chester

It's not illegal to transfer money from a business account to a personal account in the UK, but it's crucial to ensure the transfer is a legitimate business expense. Here's a breakdown:

  • Permissible Transfers: You can transfer funds to cover business expenses you've incurred personally, such as travel or meals for client meetings.
  • Important Distinction: If you take money for personal use unrelated to the business, it could be considered a dividend or salary and may incur tax implications.

To stay compliant, consider these tips:

  • Maintain Clear Records: Always keep proper receipts and invoices to document the business purpose of any transfers.
  • Transparent Accounting: Ensure your business accurately reflect these transactions.
  • Consult an Accountant: For complex situations or if you're unsure, consulting Accountants Chester to help ensure your business transactions comply with HMRC regulations and avoid any tax liabilities.

Business Accountants Chester

The short answer is no. You cannot simply withdraw money from your limited company as personal income. There are specific legal procedures to follow to avoid tax and legal complications.

Key Points for UK Limited Company Owners:

  • Salary vs. Dividends: The two main ways to take money from your company are:

    • Salary: You pay yourself as a director. This is subject to income tax and National Insurance deductions, just like any employee.
    • Dividends: You receive a share of company profits after corporation tax has been paid. Dividends are taxed differently than salaries.
  • Tax Efficiency: Accountants Chester can advise you on the most tax-efficient way to extract funds, based on your company's profits and your individual circumstances.

  • Legal Responsibilities: Directors have a responsibility to ensure the company remains solvent. Taking money without proper procedures could have legal consequences.

Why You Need an Accountant's Help

  • Avoiding Penalties: Incorrectly withdrawing money could trigger HMRC investigations and penalties.
  • Maximising Your Income: Accountants Chester can help you understand how to utilise salary, dividends, and other allowable expenses to optimise your income while staying tax-compliant.
  • Staying on Top of Regulations: Tax rules change, and accountants keep you updated.

Don't Risk It: Seek Professional Advice

If you're unsure of the best way to withdraw money from your limited company, consult Accountants Chester. They'll provide personalised guidance tailored to your situation.

Business Accountants Chester

The short answer is yes, but how you can do so depends on your business structure:

  • Sole Trader: As a sole trader, you are the business. Profits after taxes are yours to withdraw as you wish.
  • Partnership: Partnership agreements dictate profit distribution. Withdrawals are usually treated as drawings, reducing your share of the partnership's capital.
  • Limited Company: There are two main ways:
    • Salary & Dividends: Pay yourself a salary (subject to income tax and National Insurance) and potentially dividends from company profits (which have their own tax implications).
    • Director's Loan: Borrow money from the company, but it must be repaid with interest (failure to do so may have tax consequences).

Important Considerations:

  • Taxes: All withdrawals, regardless of business type, have potential tax implications. Consult Accountants Chester to understand your tax obligations.
  • Record-keeping: Maintain meticulous records of all withdrawals for tax and accounting purposes.

Seek Professional Advice: For tailored advice on the best way to withdraw money from your business while minimising tax burdens, consult Accountants Chester familiar with your specific circumstances and business structure.

Business Accountants Chester

There's no single answer to this question. The amount you can pay yourself from your limited company depends on several factors:

  • Company Profits: Your payouts are ultimately limited by the company's available profits after expenses and taxes.
  • Tax Efficiency: The most tax-efficient way to withdraw money is a combination of:
    • Salary: A modest salary takes advantage of your personal income tax allowance.
    • Dividends: Dividends have lower tax rates than salary above a certain threshold.
  • Corporation Tax: Paying yourself reduces the company's taxable profits, minimising corporation tax.
  • Your Financial Needs: Consider your personal income requirements and living expenses.
  • Financial Planning: A long-term strategy balances your personal needs with the company's reinvestment goals.

Important Considerations:

  • HMRC Regulations: Always ensure your pay structure aligns with HMRC rules to avoid penalties.
  • Dividend Allowance: The dividend tax-free allowance changes each tax year.
  • Income Tax Bands: Understand which income tax band your salary and dividends fall into.

Get Professional Advice

Accountants Chester specialise in small businesses and limited companies, and can help you:

  • Determine the most tax-efficient salary and dividend mix for your situation.
  • Ensure compliance with HMRC regulations.
  • Develop a sustainable long-term financial plan for your company and yourself.

Business Accountants Chester

The short answer is yes, but the way you do so depends on your business structure and has tax implications. Here's what you need to consider:

Business Structure

  • Sole Trader: As a sole trader, there's no clear distinction between your business and personal finances. You can withdraw money freely, but it's considered 'drawings' and is subject to income tax.
  • Partnership: Partners can withdraw profits according to their partnership agreement. These withdrawals are also subject to income tax.
  • Limited Company: As a director of a limited company, you have two main options:
    • Salary: Pay yourself a salary subject to income tax and National Insurance.
    • Dividends: Distribute company profits as dividends, which have their own tax rules.

Tax Implications:

  • Accurate Records: Meticulous bookkeeping is essential, regardless of your business structure. It's crucial to distinguish business expenses from personal withdrawals.
  • Tax Planning: The timing and method of withdrawals can affect your tax liability. Accountants Chester can help minimise your tax burden.

Accountants Chester

Accountants Chester specialise in advising businesses on appropriate withdrawal strategies considering their specific circumstances. They can:

  • Explain Tax Rules: Help you understand the tax implications of different withdrawal methods.
  • Optimise Tax Efficiency: Develop a withdrawal plan that aligns with your financial goals and minimises your tax liabilities.
  • Ensure Record-keeping: Assist with maintaining accurate financial records to support your tax filings.

Business Accountants Chester

There are several legal ways to extract money from a limited company in the UK:

  • Salary: The most common method. You pay yourself a salary via PAYE, subject to Income Tax and National Insurance. This option provides regular income and pension contributions.
  • Dividends: Distribution of profits to shareholders after Corporation Tax is paid. Dividends are often more tax-efficient than salary for higher earners.
  • Director's Loan: Borrowing money from your company, which must be repaid with interest within a set timeframe. This can provide temporary funds but carries stricter rules.
  • Company Expenses: Reimburse yourself for legitimate business expenses incurred on behalf of the company. Keep detailed records to avoid tax issues.

Important Considerations:

  • Tax Efficiency: The best method varies based on your income level and company profits. Consult Accountants Chester to optimise your strategy.
  • Legal Compliance: Ensure all extractions adhere to company law and HMRC regulations. Failure to do so carries serious penalties.

Accountants Chester:

If you're a Chester-based business owner, a local accountant can provide personalised advice on how to extract money from your limited company while maximising efficiency and ensuring compliance.

Business Accountants Chester

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The information contained in this blog is for general guidance only. It does not constitute professional advice and should not be relied upon as such. Always seek tailored advice from a qualified accountant regarding your specific circumstances.