Personal and Family Companies- Profit Extraction in 2025/26

If you run your business through a company, you will need to extract your profits if you want to use them personally. There are various ways in which this can be done, some more tax efficient than others.

If your personal allowance has not been used elsewhere, a popular and tax-efficient approach is to take a small salary and to extract further profits as dividends, assuming that you have sufficient profits available to do so. If you do not yet have 35 qualifying years, paying a salary of at least £6,500 will ensure that 2025/26 is a qualifying year for state pension purposes. However, it can be beneficial to pay a higher salary.

For 2025/26, if you have the full personal allowance available, the optimal salary is one that is equal to the personal allowance of £12,570. As this is also equal to the primary threshold for Class 1 National Insurance purposes, there will be no tax or primary Class 1 National Insurance to pay on a salary of this level. If you operate your business through a family company and are able to claim the Employment Allowance, if this is available, there will be no employer’s National Insurance to pay either.

If the Employment Allowance is not available, as is the case for a personal company where the sole employee is also a director, the company will pay employer’s National Insurance at 15% to the extent that the salary exceeds £5,000. However, as this is deductible in calculating your profits for corporation tax purposes, this is worthwhile as the corporation tax savings outweigh the employer’s National Insurance contributions.

If your available personal allowance is not £12,570, your optimal salary will depend on your individual circumstances.

Once you have taken the optimal salary, it is generally tax efficient to extract any further profits as dividends. However, you can only pay dividends if you have sufficient retained profits from which to pay them. If you have more than one shareholder for a class of share, you must also pay dividends in proportion to shareholdings (although having an alphabet share structure overcomes this limitation).

Where dividends are paid, these are tax-free up to the available dividend allowance, which for 2025/26 is set at £500. Thereafter, they are taxed at the dividend tax rates. For 2025/26 these are 8.75% where dividends fall in the basic rate band, 33.75% where they fall in the higher rate band and 39.35% where they fall in the additional rate band.

We can help you formulate a tax-efficient profit extraction strategy that works for you.