Tax-efficient ways to withdraw money from your business
Running a business comes with plenty of decisions, but one that often gets overlooked is how you actually take money out for yourself.
Many business owners think it’s as simple as transferring funds from the business account to their personal one, but that can lead to unnecessary tax bills.
There are smart, tax-efficient ways to withdraw money that keep both your personal finances and your business in good shape.
Knowing your options can help you avoid mistakes and make the most of what you’ve worked hard to earn.
Let’s take a look at some of these options.
Tax-Efficient Ways to Take Money
Salary vs dividends – what’s the smarter choice?
When it comes to taking money out of your business, the first question many owners face is whether to pay themselves a salary or take dividends.
On paper, both give you income, but they’re taxed very differently.
A salary is treated just like regular employment income, meaning you’ll pay Income Tax and National Insurance on it. The benefit is that it counts towards your state pension and other benefits, and it can also help if you need proof of income for things like mortgages or loans.
Dividends, on the other hand, are taken from the profits of your company after corporation tax has already been paid. They usually come with a lower tax rate than salary and don’t attract National Insurance, making them more tax-efficient in many cases.
Most directors don’t go all-in on one option. Instead, they use a blend of a small salary and larger dividends to reduce their tax bill while still keeping the benefits that come with a regular income. The “smarter choice” is often not one or the other, but a balance that fits your personal and business needs.
How director’s loans really work?
A director’s loan is when you take money out of your company that isn’t salary, dividends, or a reimbursement for expenses.
Think of it as “borrowing” from your own business. While it might feel like dipping into your own pocket, HMRC sees it differently.
If you take out more than you put back in, the company records it as a director’s loan account (DLA). This can be a handy way to access cash in the short term, but there are rules attached. For example, if you owe more than £10,000, it can be treated as a benefit in kind, meaning you may need to pay extra tax on it.
There’s also the 9-month rule: if the loan hasn’t been repaid within nine months of your company’s year-end, the company could face an additional corporation tax charge (currently 33.75%).
So while director’s loans can help in a pinch, they’re not a free-for-all. They work best when you understand the limits, keep proper records, and plan repayments so your company doesn’t face a surprise tax bill.
How directors’ loans really work?
Using pensions to take money out tax-efficiently
When you think about paying yourself from your business, pensions probably aren’t the first thing that comes to mind. But they can be one of the smartest ways to take money out. Why?
Because instead of handing more of your profits straight over to HMRC, you’re moving that money into a pot that belongs to you and grows for your future.
The idea is that your business can pay into your pension directly. Those payments reduce the profit your company is taxed on, which means you pay less Corporation Tax. Money that would have gone to taxes instead goes towards your retirement, and you don’t lose any of it to Income Tax or National Insurance the way you would with a salary.
Of course, pensions aren’t instant cash in your pocket. You usually can’t touch the money until at least age 55 (57 from 2028). But if you’re in a position where you don’t need every bit of profit right now, this is a clever way of paying yourself later, with the bonus of cutting today’s tax bill.
There are limits to how much you can put in each year, but for many small business owners, using pensions this way is a win-win. It’s not just about saving tax, it’s about making sure the effort you’re putting into your business today will look after you tomorrow.
Finding the right mix to keep more of your earnings
Most business owners use a mix of methods, and that’s usually where the best results come from. A bit of salary to cover day-to-day needs, some dividends to keep taxes lighter, and pension contributions for long-term planning.
Each option plays a different role, and together they can help you take money out without giving away more tax than you need to.
Think of it like balancing your diet. Too much of one thing, and it may not be healthy in the long run. But getting the right balance keeps everything working smoothly. The same goes for your earnings: the goal isn’t just to get money into your pocket today, but to do it in a way that supports your lifestyle now and your financial security later.
This is where having the right advice makes a big difference. A qualified accountant can look at your business numbers and personal goals, then help you put together a plan that’s both tax-efficient and realistic for your situation. The mix that works for someone else might not be right for you, but finding yours could mean keeping thousands more of your hard-earned money over time.
Mix of methods fo more of your earnings
Conclusion
Taking money out of your business doesn’t have to mean losing a big chunk of it to tax. With the right approach, you can pay yourself fairly today while still planning wisely for tomorrow.
Whether it’s through salary, dividends, pensions, or a combination of all three, the goal is to make sure more of what you’ve earned stays with you.
At Rhombus Accounting Firm, we understand that every business owner’s situation is unique. What works for one may not work for another, which is why we focus on giving tailored advice that helps you find the right balance. Our aim is to make your money work harder for you while keeping things clear and stress-free.
If you’d like to explore the smartest way to withdraw money from your own business, we’re here to help you keep more of your earnings where they belong, with you.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and the founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.
