FOR ADVISERS ONLY

Extracting company profits

Company directors have 3 main options when taking profits from their companies. These are salary, dividends and an employer pension contribution.

	Company tax and National Insurance contribution	Individual tax and National Insurance contribution
Salary	Employer National Insurance contribution dependent on the level taken No corporation tax	Income tax dependent on the level taken Employee National Insurance contribution dependent on the level taken
Dividends	Corporation tax No employer National Insurance contribution	Income tax at the dividend rates No employee National Insurance contribution
Employer pension contribution	No corporation tax No employer National Insurance contribution	No income tax until benefits are taken No employee National Insurance contribution

The current rate of corporation tax is 19%.
The current rate of employer National Insurance contribution is 13.8% for earnings above £9,100 a year.
The current rate of employee National Insurance contribution is 12% for earnings between £12,570 and £50,270 and 2% for everything above £50,270.

Case study

The following case study will help show how much an individual would receive after tax and National Insurance contributions using one of these options or a combination. We will assume there is profit of £100,000 to be extracted. The individuals are all resident in England for tax purposes.

Mrs Cynic needs income and is looking to take on a mortgage in the near future. So, she chooses to take all of the £100,000 as salary.

Ms Maximiser is looking to boost her pension savings. She decides to pay the full £100,000 as an employer contribution into her pension. She has unused annual allowance from previous years to carry forward to avoid any annual allowance tax charge. When she comes to take her pension savings, 25% will usually be tax free.

Miss Spendnow has always taken the minimum salary to make sure that she can avoid National Insurance contributions and then has taken the rest in dividends.

Miss Livzalife is looking to pay the maximum into her pension without paying a tax charge. This is £40,000 as she has no unused annual allowance to carry forward.

She would also like to receive the maximum salary possible to avoid paying any National Insurance contributions. She takes the remainder as dividends for her immediate income needs.

Amount to be extracted £100,000	Mrs Cynic salary only	Ms Maximiser pension contribution only	Miss Spendnow salary dividend	Miss Livzalife salary pension dividend
Corporation tax	£0	£0	£17,271³	£9,671⁵
Employer National Insurance contribution	£11,023	£0	£0	£0
Salary	£88,977¹	£0	£9,100⁴	£9,100⁴
Income tax	£23,023	£0	£14,079	£3,144
Dividend	£0	£0	£73,629	£41,229⁶
Employee National Insurance contribution	£5,298	£0	£0	£0
Employer pension contribution	£0	£100,000	£0	£40,000
Profit extracted	£60,656	£100,000 (£85,000²)	£68,650	£87,185 (£81,185⁷)

¹ Mrs Cynic’s salary has been calculated so that the salary and employers National Insurance contributions on that salary amount to £100,000. The example assumes that the income tax and national insurance rates remain constant throughout the tax year.

² Assuming Ms Maximiser is a basic rate taxpayer in retirement and 25% tax-free cash is taken, this will be £85,000 (£25,000 plus 80% of £75,000).

³ Corporation tax at 19% on £100,000 less salary of £9,100.

⁴ This is the maximum salary possible without paying any National Insurance contributions (employer National Insurance contribution threshold).

⁵ Corporation tax at 19% on £100,000 less salary of £9,100 and £40,000 pension contribution.

⁶ Dividend is £100,000 less salary of £9,100, £40,000 pension contribution and corporation tax of £9,671.

⁷Assuming Miss Livzalife is a basic rate taxpayer in retirement and 25% tax-free cash is taken this will be £34,000 (£10,000 plus 80% of £30,000). This reduces the amount extracted by £6,000.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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