Profit extraction, without the January surprise

Every January, a familiar conversation plays out across thousands of small UK companies. The director has a personal tax bill to settle, the company bank account looks healthy, and a dividend gets voted through to cover the gap. A few months later the company's own Corporation Tax bill lands, and the healthy balance turns out to have belonged to someone else all along.

I don't think this happens because directors are careless. It happens because the decisions get made in the wrong order. Taking money out of your company is mostly a sequencing problem, and once you get the sequence right, the rest becomes far less stressful.

The company's bill comes first

A limited company is a separate taxpayer. Before you, as a shareholder, have any claim on its profits, the company owes Corporation Tax on them. For most small companies that's due nine months and one day after the end of the accounting period, which is generous enough to make it easy to forget.

The rate isn't a single number any more. Taxable profits below £50,000 pay the small profits rate of 19%. Profits above £250,000 pay the main rate of 25%. In between, Marginal Relief gives a gradual increase from one to the other. Those limits shrink if your accounting period is shorter than a year, and they're divided between associated companies. If you own three other companies, for example, the limits are divided by four, so the lower one becomes £12,500.

That last point catches out a lot of serial founders. A second or third company can quietly push the first one into a higher effective rate, and you won't notice unless you work it out.

So my first rule is simple. Until you know roughly what the company owes, you don't know what it can give you.

Salary first, then dividends

Most owner-managers pay themselves through a mix of salary and dividends, and the order matters.

Salary is a business cost. It comes off the company's profits before Corporation Tax is worked out. Dividends aren't a business cost, so they're paid out of profit that has already been taxed. That difference is why a modest salary usually comes first.

To pay yourself a salary, the company has to be registered as an employer and run payroll. For 2026 to 2027, the personal allowance and the employee National Insurance primary threshold are both £12,570 a year, so a salary at that level means no Income Tax or employee National Insurance for you. The company does pay employer's National Insurance at 15% on earnings above the secondary threshold of £5,000, so it isn't completely free, but as you'll see below, the Corporation Tax saving usually outweighs it.

Once salary is settled, dividends sit on top. You get a £500 dividend allowance, and above that the rates for 2026 to 2027 are 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.

Salary first isn't a clever trick. It's just the simpler order, because each step uses the allowance that suits it.

The January mistake

Here's the error I see most often. A director looks at the bank balance, sees enough to cover their personal tax bill, and declares a dividend to match.

The trouble is that a bank balance isn't profit. The law is clear: a company must not pay out more in dividends than its available profits from current and previous financial years. That figure is profit after tax, and if you haven't worked out the tax, you don't know it.

Some of that cash will be VAT you've collected, PAYE you owe, or money set aside for the Corporation Tax bill itself. Spend it as a dividend and you may find the company can't pay what it owes, or that you've taken more than it could lawfully distribute. Neither is a conversation you want to have.

Checking what you can actually afford

Before you declare anything, run through four questions:

- What's the company's profit so far this year, after salary and other costs?

- What Corporation Tax will be due on it, given your associated companies?

- What retained profit is left from earlier years?

- What does the company need to keep for VAT, PAYE and the months ahead?

What's left is the ceiling, not the target. To declare a dividend you need to hold a directors' meeting, keep minutes even if you're the only director, and write a dividend voucher for each payment showing the date, company name, shareholders and amount.

A worked example

Take a one-director company with £45,000 of profit before paying its director. I've used 2026 to 2027 rates, assumed no other income and no associated companies, and ignored pensions and Employment Allowance to keep things simple.

In the first version, the director takes no salary at all. The company pays 19% Corporation Tax, which is £8,550, leaving £36,450 to pay out as a dividend. The personal allowance covers the first £12,570, the dividend allowance covers another £500, and the remaining £23,380 is taxed at 10.75%, roughly £2,513. The director keeps about £33,937.

In the second version, the director takes a salary of £12,570 first. There's no Income Tax or employee National Insurance on it. The company pays employer's National Insurance of £1,135.50 on the slice above £5,000. Both are deducted from profit, leaving taxable profit of about £31,295 and Corporation Tax of roughly £5,946. That leaves about £25,349 for a dividend. After the £500 allowance, the rest is taxed at 10.75%, roughly £2,671. Add the salary back and the director keeps about £35,247.

Same company, same profit, about £1,300 more in the director's pocket, simply from doing things in the right order. Your own numbers will differ, but the principle holds.

What to put in the diary

The fix is a few dates, not a complicated strategy. At the start of each tax year in April, set the salary for the year and set up payroll to match. A month or two before your company's year end, estimate profit and the Corporation Tax due. Only then decide on dividends, and minute them properly.

Then put the Corporation Tax payment date, nine months and one day after your year end, in the diary with a reminder a month ahead. And put your own Self Assessment deadline next to it, so January's bill is planned for in the autumn rather than discovered in the new year.

Get the order right and January stops being a surprise. It becomes just another date you saw coming.

About the author

Alex is part of the team at Taxley, which makes Corporation Tax filing software for UK limited companies. Free to prepare; pay per filing. taxley.co.uk

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