How to extract profits out of a company

Believe it or not, there are more than 4.7 million limited companies registered in the UK, including the 810,316 incorporations that signed up in 2020/21.

Only around 2m are actively trading, but the number of new companies formed during the previous tax year was a 22% year-on-year increase.

Unsurprisingly, that percentage represented the highest number of incorporations on record. Surprisingly, this record high was reached during COVID-19.

As well as starting a company in the middle of a pandemic, company directors also need to work out the most tax-efficient ways to pay themselves.

Once you’ve set up an incorporated business and become a director, you have to be smart about how you extract profit to avoid paying more tax than you need to.

There are three main routes for a director to extract profits from their own limited company – salary, dividends and pension contributions. Usually, combining these three methods is the most tax-efficient approach to minimise your tax bill.

With corporation tax applying (at 19% in 2021/22) on any of your company’s taxable profits from its accounting period, the money you take out of the profits to pay yourself can potentially reduce your company’s corporation tax liability.

Read more on How to extract profits out of a company here.