As a business owner, one of the key challenges you face is taking money out of your limited company in a tax-efficient way. If you’re ambitious and looking to grow, minimising unnecessary tax payments is essential to keeping more cash in your business (and your pocket!). Fortunately, there are several ways you can legally withdraw funds without getting hit with a hefty tax bill.

Here’s a breakdown of the most effective strategies:

Pay Yourself a Salary

One of the most common ways to withdraw money is through a salary. However, when it comes to tax efficiency, you’ll want to keep your salary low, just enough to cover your National Insurance contributions (NIC).

Why? Salaries are subject to both income tax and NICs, and your company will also need to pay employer NICs on top.

Tip: A common practice is to set your salary at the personal allowance threshold (£12,570 for 2024/25). This way, you avoid income tax while qualifying for state benefits like your state pension.

Dividends: The Profit-Friendly Option

Dividends are payments made from your company’s post-tax profits. They’re often more tax-efficient than salary as they’re not subject to NICs.

Why? Dividend tax rates are lower than income tax rates. The tax-free dividend allowance for 2024/25 is £500. Above this, basic-rate taxpayers pay 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%.

Tip: A combination of a modest salary and dividends can help you utilise both allowances, maximising your tax efficiency.

Pay Family Members

If family members (such as your spouse or children) are genuinely involved in your business, paying them a salary can be a great way to share income tax efficiently.

Why? It allows you to benefit from their personal allowances and lower tax brackets.

Tip: The salary must reflect the actual work done; otherwise, HMRC could view it as tax avoidance. Keep accurate records to justify the payments.

Contribute to a Pension

Pension contributions are an excellent long-term tax-efficient way to withdraw money from your business, whilst building yourself a future income. Your company can pay directly into your pension as an employer contribution, and this will be treated as a tax-deductible business expense.

Why? You’ll not only reduce your company’s taxable profits, but also grow your pension pot tax-free.

Tip: For 2024/25, the annual pension contribution limit is £60,000, giving you ample room to save while reducing corporation tax.

Tax-Efficient Life Insurance

Taking out life insurance through your limited company under a Relevant Life Plan (RLP) is another smart option. This plan provides life cover as a tax-deductible business expense.

Why? Premiums are usually free from National Insurance and income tax, and they’re not considered a taxable benefit for you as a director.

Tip: An RLP can be particularly beneficial if you’re looking for affordable life insurance coverage while minimising tax.

Opt for an Electric Car

If you are looking to take a company car, electric cars offer several tax breaks. If your company purchases or leases an electric vehicle for your use, you can benefit from reduced Benefit in Kind (BIK) rates.

Why? Electric cars attract a much lower BIK tax rate (as low as 2% for 2024/25), making them a great perk without the hefty tax bill.

Tip: Fully electric cars also qualify for 100% first-year capital allowances, meaning your company can deduct the full cost from its taxable profits.

Use a Director’s Loan Account

If your company owes you money (e.g., from expenses you’ve paid personally), you can take it back tax-free via the Director’s Loan Account (DLA) or even consider charging your company interest on the loan. As an individual you can earn £1,000 of interest income, tax free by utilising your Personal Savings Allowance.

Why? A DLA allows you to withdraw money without immediate tax implications. However, be mindful if you owe the company money — this can result in a taxable benefit if not repaid within nine months of the accounting period’s end.

Tip: Keep meticulous records to avoid issues with HMRC and maintain clarity on what is owed.

Maximizing Your Withdrawals and Minimizing Your Tax Bill

A combination of the above approaches is often the best way to withdraw funds from your company without paying too much tax. By strategically balancing salary, dividends, pension contributions, and other perks like life insurance and electric cars, you can enjoy the fruits of your hard work while keeping the taxman at bay.

Remember, tax planning is not a one-size-fits-all. Speak to an expert to ensure your approach suits both your personal and business circumstances.