Advanced Taxation (UK) · Alternative ways of achieving personal or business outcomes and their tax consequences

Extracting Profits: Salary, Dividends, Pensions and Benefits

Updated 11 October 2026 · Fact-checked

Extracting profits means choosing how an owner-manager takes money out of a company: salary or bonus, dividends, employer pension contributions or benefits. You compare the total tax cost of each route, covering corporation tax, income tax and NIC, for the company and the owner together. Then you recommend the cheapest route that fits the owner's circumstances.

Understand Extracting Profits: Salary, Dividends, Pensions and Benefits

An owner-managed company and its owner are two taxpayers. Profit taxed in the company can reach the owner in several ways. Each way has a different total tax cost. ATX asks you to compare them and advise.

Salary or bonus is a deductible expense for the company, if it is wholly and exclusively for the trade and is reasonable. It saves corporation tax. But it is taxed on the owner as employment income at normal rates (20%, 40%, 45%). It also attracts employee and employer NIC. The rates for NIC come from the tax tables in the exam, so always read them.

Dividends are paid from after-tax profit. They are not deductible, so there is no corporation tax saving. They carry no NIC. The owner pays income tax at the dividend rates: 8.75%, 33.75% and 39.35%. The first £500 of dividends is covered by the dividend nil rate band. Dividends are treated as the top slice of income. The company's profit has already borne corporation tax at 19% to 25%, with marginal relief between £50,000 and £250,000 of profits.

Employer pension contributions are usually deductible for the company. The owner pays no income tax and no NIC on them. They are limited by the annual allowance of £60,000 for 2023/24 to 2025/26 (with tapering for very high income) and by the wholly and exclusively test. They lock the money away, so cash needs matter. Benefits in kind can be efficient in some cases. A company van or an electric car attracts a low or nil taxable benefit. But the company pays Class 1A NIC on benefits, and the owner pays income tax on the benefit value.

The owner's other income drives the answer. At about £100,000 of adjusted net income, the personal allowance of £12,570 starts to be withdrawn. It reaches zero at £125,140. Between those limits the effective marginal rate is higher than the headline rate. Pension contributions can pull income back below £100,000 and restore the allowance. A good answer compares figures, considers the owner's needs and finishes with a clear recommendation.

Key rules to remember

Income tax rates (normal): Basic £1 – £37,700: 20%; Higher £37,701 – £125,140: 40%; Additional over £125,140: 45%; Apply to salary, bonus and benefits. Bands are taken from the tax tables.
Dividend rates: Basic 8.75%; Higher 33.75%; Additional 39.35%; Dividends are the top slice of income. The first £500 is the dividend nil rate band, taxed at 0%, but it still uses up part of the band.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil at £125,140 or more; Effective marginal rate on income between £100,000 and £125,140 is higher than the headline rate. Pension contributions reduce adjusted net income.
Corporation tax: Small profits rate 19% (profits up to £50,000); main rate 25% (profits over £250,000); Limits are divided between associated companies. Marginal relief applies between the limits.
Marginal relief: (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits; Upper limit £250,000. Used where profits fall between £50,000 and £250,000.
Salary deduction test: Salary is deductible only if wholly and exclusively for the trade and not excessive; Dividends are never deductible. Salary to family members must reflect real work.
Pension limits: Annual allowance £60,000 (2023/24 to 2025/26); minimum allowance £10,000; threshold income £200,000; income limit £260,000; Maximum contribution with no earnings that qualifies for relief is £3,600. Employer contributions are not limited to earnings but must pass the wholly and exclusively test.
Benefit scales: Car fuel base £28,200; van benefit £4,020; van fuel £769; zero-emission van 0%; electric car 3%; Car benefit = list price × percentage. Company pays Class 1A NIC on benefits. Use the tax tables for NIC rates.
Interest rates: Official rate 3.75%; underpaid tax 8.50%; overpaid tax 3.50%; Official rate is used for beneficial loans. Loan routes to extract cash have their own rules.

How to solve Extracting Profits: Salary, Dividends, Pensions and Benefits questions

Use this method for any question asking how an owner-manager should take profits from a company.

1Identify the facts: company profit level, associated companies, whether the owner has other income, and what the owner needs (cash now, pension, long-term saving).
2Fix the owner's tax position first. Work out their other income, how much of the personal allowance is left, and which band the extraction will fall in. Check the £100,000 to £125,140 zone.
3Calculate the company side for each route: corporation tax saved on salary, bonus, employer NIC and pension contributions, and no saving on dividends.
4Calculate the owner side: income tax at normal or dividend rates, the £500 dividend nil rate, and employee NIC on salary. Take rates from the tax tables.
5Compare the total tax cost and the net cash to the owner for each route. Use the same starting figure for all routes, such as the same pre-tax profit.
6Add alternatives: employer pension contributions, tax-efficient benefits, or keeping profit in the company. Check limits such as the annual allowance.
7Recommend a route, with reasons, and state the assumptions. Mention non-tax factors such as cash flow, future state pension entitlement and risk.
8Show professional skills: write clearly, use headings and keep each point linked to the client's facts.

Quickest way: Compare per £1 of pre-tax profit

When to use it: Use when time is short and the question asks which route is cheaper, with no need for full computations.

Start from a round figure of pre-tax profit, such as £1,000 or the figure in the question.
Dividend route: deduct corporation tax at the company's rate, then deduct dividend tax at the owner's marginal dividend rate.
Salary route: reduce the profit to allow for employer NIC, then deduct income tax and employee NIC at the owner's marginal rates.
Compare what is left. Higher NIC usually makes salary worse, but at lower income levels the personal allowance or small profits rate can change this.
Check if the owner is in the £100,000 to £125,140 zone. If so, test an employer pension contribution, which usually gives the best result.
State the answer in one line and add the main assumption.

Common mistakes in Extracting Profits: Salary, Dividends, Pensions and Benefits

Treating dividends as deductible for the company.
Salary is deductible, so students assume all extraction is.
Fix: Dividends are paid from after-tax profit. Always deduct corporation tax before calculating the dividend available.
Ignoring NIC when comparing salary and dividends.
Students focus on income tax rates because they are easier to remember.
Fix: Include employer and employee NIC on salary and bonus, and Class 1A on benefits. Read the NIC rates in the tax tables. Dividends carry no NIC.
Forgetting the dividend nil rate band, or applying it after other bands.
The £500 band is small and easy to forget.
Fix: Tax the first £500 of dividends at 0%. Dividends are the top slice of income, and the £500 still uses up part of the band it sits in.
Missing the personal allowance reduction for income over £100,000.
Students apply £12,570 automatically.
Fix: Calculate adjusted net income first. Reduce the allowance by £1 for every £2 over £100,000. It is nil at £125,140 or more.
Recommending employer pension contributions without checking limits.
Students see tax relief and stop there.
Fix: Check the annual allowance, tapering, the wholly and exclusively test, and whether the owner can access the money. Mention that contributions are locked in until retirement age.
Ending without a clear recommendation.
Students finish the numbers and run out of time.
Fix: Always write a short conclusion that names the best route, states the saving and gives the key assumption. These are professional skills marks.

Worked examples

Example 1

Aisha owns all the shares in Birch Ltd. She has other taxable income of £60,000 (salary from another job). Birch Ltd has £11,500 of profit before corporation tax and before any payment to Aisha. Compare paying a dividend with paying a bonus. Assume corporation tax at 19%, employer NIC at 15%, employee NIC at 2% on the bonus, no employment allowance, and that all profit is paid out. NIC rates are assumed for this example; in the exam use the tax tables.

Show the solution

Dividend route, company: corporation tax = £11,500 × 19% = £2,185. Profit after tax = £9,315, so the dividend is £9,315.
Dividend route, Aisha: her other income of £60,000 less personal allowance £12,570 leaves £47,430, so she is already a higher rate taxpayer. All dividends are in the higher rate band.
Dividend tax: first £500 at 0%. The remaining £8,815 at 33.75% = £2,975.06. Net cash to Aisha = £9,315 – £2,975.06 = £6,339.94.
Total tax on the dividend route = £2,185 + £2,975.06 = £5,160.06.
Bonus route, company: the bonus plus employer NIC must equal £11,500. Bonus £10,000 + employer NIC £1,500 (15%) = £11,500. Both are deductible, so corporation tax is nil.
Bonus route, Aisha: income tax at 40% = £4,000. Employee NIC at 2% = £200. Net cash = £10,000 – £4,000 – £200 = £5,800.
Total tax on the bonus route = £1,500 + £4,000 + £200 = £5,700.
Compare: dividend net £6,339.94 against bonus net £5,800. Difference = £539.94.

Answer: The dividend route is better by about £540. Aisha keeps £6,339.94 net as a dividend, compared with £5,800 from a bonus. Total tax is £5,160.06 on dividends against £5,700 on a bonus.

Example 2

Ben is the director and sole shareholder of Cedar Ltd. In the tax year he will have a salary of £70,000 and dividends of £50,000. He has no other income. Calculate his income tax now. Then calculate the tax if he makes a personal pension contribution of £20,000 gross. Assume the contribution is within his annual allowance and his relevant earnings, and that basic rate relief is given at source.

Show the solution

Before the contribution: adjusted net income = £70,000 + £50,000 = £120,000. This is £20,000 over £100,000, so the personal allowance falls by £10,000 to £2,570.
Non-dividend income: £70,000 – £2,570 = £67,430. Tax: £37,700 × 20% = £7,540; £29,730 × 40% = £11,892.
Dividends of £50,000 sit in the higher rate band (total taxable income £117,430 is below £125,140). First £500 at 0%. £49,500 × 33.75% = £16,706.25.
Tax before the contribution = £7,540 + £11,892 + £16,706.25 = £36,138.25.
After the contribution: adjusted net income = £120,000 – £20,000 = £100,000. The personal allowance is restored to £12,570. The basic rate band is extended by the £20,000 gross contribution to £57,700.
Non-dividend income: £70,000 – £12,570 = £57,430. All of it is within the extended basic band: £57,430 × 20% = £11,486.
Dividends: first £500 at 0%, using £270 of the remaining basic band and £230 of the higher band. Remaining £49,500 × 33.75% = £16,706.25.
Tax after the contribution = £11,486 + £16,706.25 = £28,192.25.
Saving = £36,138.25 – £28,192.25 = £7,946.00. Ben also receives £4,000 basic rate relief at source on the £20,000 gross contribution, so his net payment is £16,000. After the tax saving of £7,946, the net cost is £16,000 – £7,946 = £8,054.

Answer: The £20,000 gross pension contribution cuts Ben's income tax from £36,138.25 to £28,192.25, a saving of £7,946. This is because the personal allowance is restored and the basic rate band is extended. The net cost of the contribution is £8,054 after the £4,000 relief at source.

Exam tips

Always calculate the owner's adjusted net income first. Many ATX scenarios are built around the £100,000 to £125,140 personal allowance trap.
Show corporation tax, income tax and NIC separately in a table of workings. This earns marks even if one figure is wrong.
Use the NIC rates and the tax rates in the exam tax tables. Never rely on memory for NIC.
Always finish with a recommendation and a sentence on risks and non-tax factors, such as pension access and cash flow. These support professional skills marks.
If the question includes family members, consider spreading income to use their personal allowances and basic rate bands. Check the wholly and exclusively rule for salaries.

Practice questions from Alternative ways of achieving personal or business outcomes and their tax consequences

Extracting Profits: Salary, Dividends, Pensions and Benefits: frequently asked questions

Is it better to take salary or dividends from my own company?

It depends on your other income and the company's profit. Dividends avoid NIC but are paid after corporation tax and are not deductible. Salary saves corporation tax but carries NIC. Calculate the total cost of each route before deciding.

Why does personal allowance withdrawal matter in ATX?

Between £100,000 and £125,140 of adjusted net income, the personal allowance falls by £1 for every £2 of income. This gives a higher effective marginal rate. Personal pension contributions, which are grossed up and deducted in arriving at adjusted net income, can bring income down and restore the allowance. Employer contributions avoid adding to your income, but they do not reduce it.

Are employer pension contributions deductible for the company?

They are normally deductible if they meet the wholly and exclusively test. The owner pays no income tax or NIC on them. They are limited by the annual allowance, which is £60,000 for 2023/24 to 2025/26, subject to tapering.

Do dividends carry National Insurance?

No. Dividends do not attract NIC for the company or the shareholder. That is a main reason owner-managers often prefer them, but the company must already have paid corporation tax on the profit.

Which tax rates do I use in the ATX exam?

Use the tax tables that ACCA provides for the Finance Act 2025. They give income tax rates, dividend rates, corporation tax rates, pension limits and benefit scales. Do not invent or recall rates from memory.