Legal Ways to Take Money from Your UK Business: A Complete Guide

If you run a small business in the UK, one of the most important questions you’ll face is: “What’s the best way to take money out of my business legally, without paying more tax than necessary?” Whether you’re a limited company director, sole trader, or small business owner, understanding your options can save you thousands of pounds each year.

In this guide, we’ll explore the main legal ways to take money from your business, explain the tax implications, and provide practical advice to make the most of your profits.

1. Take a Salary

How it works:

Paying yourself a salary through PAYE (Pay As You Earn) is the most straightforward method. Your salary is treated like any other employee’s, with tax and National Insurance Contributions (NICs) deducted automatically.

Tax considerations:

Subject to Income Tax and Employee NICs.
Employer NICs also apply but can be deducted as a business expense.
The salary is deductible for Corporation Tax, which reduces your company’s taxable profit.

Pros: Provides consistent income and counts towards your state pension.

Cons: Higher tax and NICs than dividends, and salary must be “reasonable” for the role.

Pro tip: Many small business owners use a modest salary just above the NIC threshold, then supplement with dividends for tax efficiency.

2. Take Dividends

How it works:

If your business is a limited company, you can take profits as dividends after paying Corporation Tax. Dividends are payments to shareholders and do not count as a business expense.

Tax considerations:

Corporation Tax must be paid on profits first (19–25% depending on profit level).
Dividend tax rates in the UK are lower than income tax: 8.75% (basic), 33.75% (higher), 39.35% (additional), after a £500 dividend allowance.
No NICs are payable on dividends.

Pros: Very tax-efficient, flexible timing, ideal for profit extraction.

Cons: Can only be taken from retained profits—cannot create artificial dividends if the company isn’t profitable.

3. Use a Director’s Loan

How it works:

A director’s loan allows you to borrow money from your company. This can be useful for short-term cash needs.

Tax considerations:

Repay within 9 months of the company year-end: no tax.
Unpaid loans: 32.5% Corporation Tax charge (s455).
Low-interest loans can trigger a Benefit-in-Kind, which is taxable.

Pros: Flexible and convenient.

Cons: Formal records are required, and tax may be due if not repaid on time.

4. Make Pension Contributions

How it works:

Your company can contribute directly to your pension, reducing your taxable profits.

Tax considerations:

Contributions are deductible for Corporation Tax.
No income tax or NICs are applied on contributions.
Annual allowance is currently £60,000 (£240,000 if using carry-forward rules).

Pros: Extremely tax-efficient, especially for high earners.

Cons: Money is locked until retirement, and allowances must be followed.

5. Claim Expenses or Reimbursements

How it works:

You can reclaim money spent personally on business activities, like travel, equipment, or supplies.

Tax considerations:

Must be wholly, exclusively, and necessarily for business.
Reimbursements are not taxable.

Pros: Reduces personal costs without paying extra tax.

Cons: Only legitimate business expenses count—HMRC may challenge improper claims.

6. Use Benefits-in-Kind

How it works:

Your company can provide perks such as a company car, private health insurance, or a mobile phone.

Tax considerations:

Employee taxed on the cash value of the benefit.
NICs may also apply.

Pros: Can reduce salary while providing valuable perks.

Cons: Taxable and requires careful recordkeeping.

7. VAT Timing & Cash Flow Planning

How it works:

For VAT-registered businesses, careful timing of sales and purchases can help manage VAT payments.

Tax considerations:

Doesn’t reduce income tax directly but improves cash flow.
Must follow HMRC VAT rules.

Pros: Improves business liquidity.

Cons: Complex to manage and no direct personal tax benefit.

Recommended Strategy for Small UK Businesses

Most tax-savvy business owners combine multiple methods:

Modest salary just above NIC thresholds.
Dividends from retained profits for tax efficiency.
Pension contributions to reduce corporation tax and defer personal tax.
Expenses and selective benefits to cover legitimate business costs without extra tax.

Final Thoughts

Understanding how to legally and efficiently take money from your business can make a huge difference to your personal income and long-term financial security. Using a mix of salary, dividends, pensions, and legitimate expenses ensures you stay compliant while minimising tax.

For small business owners, the key is planning ahead, keeping accurate records, and combining strategies to maximise both cash flow and tax efficiency.