In the UK, small business owners provide a living for a large proportion of the population. According to FSB, 16.9 million peoople were employed by small and medium-sized enterprises (SMEs) at the start of 2025, representing almost 60% of private sector jobs.
However, while business owners are good at providing financial security for others, they often don’t take care of their own finances as well as they could. With that in mind, here’s a look at how UK business owners can achieve tax-efficient profit extraction and gain more control over their personal finances.
1. Pension contributions
Why pensions are tax-efficient for profit extraction
One of the most effective strategies for tax-efficient profit extraction is making contributions into a pension.
These payments can qualify as an allowable business expense, reducing your Corporation Tax liability by up to 25%. Additionally, pension contributions are not subject to employer National Insurance Contributions (NICs), currently charged at 15% on salary above £5,000 per annum. Combined, this makes pensions a highly efficient way to extract profits from your business, offering potential tax savings of up to 40%.
Long-term planning and potential estate benefits
The tax savings don’t stop there. By contributing to a pension, a business owner can reduce exposure to Income Tax and NICs compared to salary or dividends.
Pension funds are generally excluded from your estate for Inheritance Tax purposes if death occurs before age 75, making them a potentially valuable component of estate planning for business owners with long-term goals.
Income Tax is deferred
Another benefit of this profit extraction method is that Income Tax is deferred until the funds are withdrawn. Deferring Income Tax through pension contributions can offer significant long-term planning advantages. With 25% of the pension pot typically available tax-free (subject to a maximum) and the remainder taxed at your marginal rate, many business owners may benefit from a lower overall tax burden in retirement.
Contribution limits and restrictions
You can pay as much money into your pension from your business as you like, provided the payments meet HMRC’s ‘wholly and exclusively’ test. This states that contributions must be reasonable and not exceed the company’s annual profits. However, employer contributions count towards your annual pension allowance, which is £60,000 for the 2025/26 tax year.
Exceeding this allowance may trigger a tax charge unless you can use unused allowances from the previous three years under carry forward rules. For high earners, the Tapered Annual Allowance can reduce this limit to as low as £10,000 if adjusted income exceeds £260,000.
As a long-term profit extraction strategy, pensions require a long view. The funds are typically not accessible until age 55 (rising to 57 in 2028), so they may not be suitable for business owners needing short-term access to capital. However, for those with sufficient liquidity elsewhere, pensions remain one of the most efficient ways to extract value from your company.
2. Dividends
This brings us to dividends, which can be a relatively effective profit extraction strategy if you need the capital now. Dividends come from company profits after Corporation Tax, and when structured carefully, they can reduce your overall tax burden. One advantage of taking company profits as dividends is that neither the company nor you as the owner will have to pay NICs on them (provided your salary stays below the NIC threshold).
Another advantage of this strategy is that your personal tax liabilities are likely to be smaller because the tax rates on dividends are lower than the tax rates on regular income.
For 2025/26, tax rates on dividends are:
- Basic-rate taxpayer – 8.75%
- Higher-rate taxpayer – 33.75%
- Additional-rate taxpayer – 39.35%
This compares to regular Income Tax rates of:
- Basic-rate taxpayer – 20%
- Higher-rate taxpayer – 40%
- Additional-rate taxpayer – 45%
You can also earn up to £500 in dividends for the 2025/26 year tax-free.
Higher earners can still benefit from this strategy. By combining a low salary with dividend payments, you can make full use of tax allowances and reduce exposure to higher NICs. This approach creates room for more strategic control over your annual income, helping you manage thresholds, allowances, and long-term tax liabilities more effectively.
To get the balance right, work with a financial planner who can design a profit extraction plan that aligns with both your immediate income needs and your broader wealth objectives.
3. Holding companies
Looking beyond pension contributions and dividends, another tax-efficient profit extraction strategy to consider is setting up a holding company. A holding company is an entity designed to own assets, investments, and interests in other companies, rather than provide goods and services itself.
One major attraction of holding companies is that assets from subsidiary companies can be transferred into them without being subject to tax at the point of transfer. Dividends received by holding companies from subsidiaries are also exempt from Corporation Tax. This means that these structures can offer opportunities to reduce tax.
A holding company structure may also enable a trading subsidiary business to be sold tax-free. If the holding company has owned at least 10% of a subsidiary company’s shares for at least 12 consecutive months during a two-year period prior to the disposal, the shares can be disposed of without a Corporation Tax liability. This is known as the Substantial Shareholding Exemption (SSE).
It’s worth pointing out that establishing a holding company can have other benefits. For example, holding companies allow business owners to protect their assets by shielding them from subsidiary company risks.
However, holding company structures introduce complexity. You’ll need tailored legal, tax, and financial planning advice to ensure the structure meets HMRC requirements and aligns with your long-term goals.
How Bowmore can help UK business owners with profit extraction
In conclusion, there are a number of strategies that UK business owners can employ to extract profits from their companies' tax-efficiently. From making pension contributions to setting up a holding company, these approaches help maximise personal wealth while supporting the ongoing success of the business.
However, before moving forward with a profit extraction strategy, it can be worth speaking to a financial planner. A planner will take the time to assess your current and future income needs and help you determine the most tax-advantageous approach for your specific circumstances.
At Bowmore, we have decades of experience helping small business owners build wealth outside their companies. We understand the challenges business owners in the UK face, and we can help you navigate them.
To find out more about how we can help you with tax-efficient planning, get in touch.
Regulatory Information
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
- Bowmore Financial Planning Ltd is not regulated to provide tax advice.
- The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
- A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
- The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.