Profit Extraction in 2025 – What UK Entrepreneurs Need to Know
George Farrington · Posted on: June 5th 2025 · read
The 2024 election saw a change of power in the UK for the first time in over a decade. Following this change and the subsequent 2024 Autumn Budget, we have seen shifts in how UK entrepreneurs and business owners should approach profit extraction.
Campaign promises from the Labour Party to protect ‘working people’ led many to the conclusion that it would likely be businesses who would take the hit to fund policy ambitions - this proved true in part, with the rate of employers’ national insurance increased from 13.8% to 15% from 6 April 2025.
With the increase in national insurance, and corporation tax now tiered up to 25%, the way business owners extract profits has never been more important.
What are the key considerations?
A staple debate for ongoing profit extraction continues to be dividend versus salary.
The high-profile Autumn Budget in October 2024 saw the continued freeze of income tax rates, with dividends continuing to be taxed at the lower rates of 8.75%/33.75%/39.35% compared to 20%/40%/45% for non-savings and savings income, suggesting dividends to be the preferred option.
Instead, a mix of salary and dividends has become a common strategy, allowing shareholders to utilise unused personal allowances more effectively. With salaries attracting higher rates of income tax, shareholders can pay themselves a salary equal to any unused personal allowance, exempting those amounts from income tax, leaving additional amounts to be declared as dividends and taxed at the lower rates of income tax. Whilst this method provides a higher income tax saving, salaries are subject to the increased employers’ national insurance, whilst dividends are not.
The distributable reserves position of the company must always be considered when seeking to declare dividends. Dividends declared in excess of a company’s distributable reserves are considered unlawful. The declaration of unlawful dividends can have serious implications for company directors and might ultimately need to be repaid to the company.
Thinking about the wider family when strategising profit extraction has its advantages.
Paying a salary to family members is an excellent way to avoid the abatement of personal allowances. Provided the expenditure is incurred wholly and exclusively for the purposes of the company’s trade, the salary is also allowable as a corporation tax deduction.
Non-earnings-based extraction options are becoming more popular.
Although the government offered some mitigation to the national insurance rise by increasing the national insurance employment allowance from £5,000 to £10,500, the rise to 15% is expected to give an extra pinch to salary-based strategies and raise the profile of non-earnings-based options to extract profits.
The most common non-earnings-based option is employer pension contributions. These are free from tax and national insurance, as well as being corporation tax deductible, provided they pass the wholly and exclusively incurred test. Attention should be paid to the available annual allowance for the beneficiary of the contributions.
"Popular alternative non-earnings-based options for shareholders are interest on loans made to the company or rent for the use of personally owned property. Both are deductible for corporation tax and free from national insurance. Any rent should be kept at market value as anything less than that can inhibit future reliefs from capital taxes arising upon exit from the business, and the associated disposal of the relevant property."
What else?
In 2023, the corporation tax main rate rose from 19% to 25% for companies whose taxable profits exceed £250,000. Companies with profits under £50,000 continue to be taxed at 19%, with a marginal rate of 26.5% for profits between those two thresholds (all limits are divided by the number of associated companies).
The corporation tax deductibility of the methods used to extract cash from a company should therefore be considered. Some extraction methods can help to reduce the company’s taxable profits below the small profits threshold of £50,000, decreasing amounts subject to charge as well as providing an incremental saving through the availability of the lower rate of 19%.
MHA can help
Effective profit extraction can be somewhat of a balancing act, depending on the specific circumstances. If you’re considering how best to adapt your remuneration or profit extraction approach, we’d be happy to help.
For guidance on this area or other related tax matters, please contact your usual MHA advisor, or a member of our Private Client Tax team
