With limited companies, business profits belong to that company as a separate legal person and are subject to corporation tax on them; the company’s owner will generally be subject to income tax and National Insurance contributions (NICs) on whatever they withdraw. It is different from a sole trader or partner, who is taxed on their profit (or profit share) irrespective of their drawings.
Shareholders and directors can therefore plan the extent of their withdrawals in an attempt to mitigate their personal tax liability.
Who Can Take Profits from A Company?
Shareholders own the company and take distributable reserves in the form of dividends. These are taxed more favourably than other types of income – they are subject to lower rates of income tax and are exempt from NICs, so they will usually make up the bulk of a small company owner’s remuneration.
For smaller or medium-sized businesses, shareholders will usually also be the directors; these are officers registered as such at Companies House who actually run and manage the company day-to-day and, for tax purposes, are treated as employees of the company.
They will be on the company’s payroll and be able to draw a salary (along with bonuses) subject to PAYE income tax and NICs; officers can draw a fee, but anything beyond those duties can attract a larger salary. Pension (employer) contributions can also be made.
However, whilst salaries, bonuses, and pension contributions are deductible for corporation tax purposes, dividends come from post-tax profits, so there is no such deduction for the company.
How Else Can Profits Be Withdrawn?
Whilst dividends and salaries or bonuses are usually the main means of profit withdrawal, the company can also be charged rent for use of the director shareholder’s land and property (e.g., personallyowned company trading premises). Assets owned personally and used by one’s company can have adverse implications for inheritance tax (i.e., only 50% business property relief) and capital gains tax (CGT) for elements of non-business ownership (and charging rent for business asset disposal relief (BADR)).
Likewise, interest can be charged for the company’s use of an individual’s capital, i.e., loans, rent and interest paid are deductible for the company and, whilst subject to income tax for the owner, are exempt from NICs.
As well as loans being made to the company to receive interest, the company can make loans to the director shareholders. The company is charged a ‘deposit’ (a ‘section 455 charge’) of 33.75% of the loan, returnable when the loan is repaid or written off; however, for the individual, a written-off loan is taxed as a dividend or salary. Outstanding loans (charging below the official rate of interest) above £10,000 will also attract an income tax benefit-inkind charge for the individual (and Class 1A NICs for the company). Thanks to ‘bed and breakfasting’ anti-avoidance rules, the section 455 charge is not returned in full if a loan is repaid but another over £5,000 is subsequently taken out again within 30 days (unless that loan is paid off by salary or dividend).
Once a shareholder has decided that the company has ceased trading, profits therein can be withdrawn by liquidating the company. Once a liquidator has been appointed, distributions from the company are taxed as capital, potentially with the benefit of BADR and the 10% (increasing to 14% from April 2025, and 18% from April 2026) CGT rate afforded to trading company shares where the BADR conditions are satisfied.
Practical Tip
The shareholder or director’s personal tax position will usually dictate to what extent, and in what form, a company’s profits are withdrawn. An advantage of a limited company is that profits do not have to be withdrawn at all and are not subject to personal tax. Holding assets outside a company to draw a rent can have potentially adverse capital tax consequences and taking loans farom a company can also have tax consequences for the company and individual.