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 (NI)

Individual tax and National Insurance (NI)

Salary

Employer NI dependent on the level taken

No corporation tax 

Income tax dependent on the level taken

Employee NI dependent on the level taken

Dividends

Corporation tax

No employer NI 

Income tax at the dividend rates

No employee NI

Employer pension contribution 

No corporation tax

No employer NI 

No income tax until benefits are taken

No employee NI

  • The current rate of corporation tax is 19%
  • The current rate of employer NI is 13.8% for earnings above £8,632 per year
  • The current rate of employee NI is 12% for earnings between £8,632 and £50,000 and 2% for everything above £50,000

Case study

The following case study will help show how much an individual would receive after tax and NI 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 60 and is looking to boost her pension savings.  She decides to pay the full £100,000 as an employer contribution into her pension and take the PCLS immediately.  She has unused annual allowance from previous years to carry forward to avoid any annual allowance tax charge.

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 minimum salary to ensure she receives credit towards the state pension.  She takes the remainder as dividends for her immediate income needs. 

£100,000

Mrs Cynic

Salary only

Ms Maximiser

Pension contribution only

Miss Livzalife

Mix of all 3
Corporation tax  £0  £0 £9,760
Employer NI £12,609  £0  £0
Salary £87,391  £0  £8,6321
Income tax £22,456 £0 £2,741
Dividend £0  £0 £41,608
Employee NI £5,712 £0 £0 
Employer pension contribution  £0 £100,000 £40,000
Profit extracted £59,223 £100,000 (£85,0002) £87,499

1 This is the minimum salary in order to receive credit towards the state pension.

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

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