Five tax-efficient ways to extract personal wealth from your business

Are you guilty of treating your business like a pension?

If you’re not sure what we mean, think of it this way: you own a business that has grown in value over time and plan to sell it when you retire, using the capital from the sale to fund your retirement.

Whilst this is a common strategy that could come in handy to you (more on this later), many business owners forget that extracting wealth from a business throughout its life span, not just in one fell swoop, can be extremely useful too.

When drawing personal wealth from your business, tax might be on your mind too, especially in light of recent stealth taxes and proposed levies coming up in the 2024 Autumn Budget. We’ll be covering the Budget after it happens, so watch this space for a full breakdown of the Chancellor’s announcements.

In the meantime, keep reading to discover five tax-efficient ways to extract wealth from your business.

1. Pay yourself a salary

It’s common for business owners to pay themselves very little when their company is just starting out, in order to keep overheads low. But once your business is established, it’s incredibly useful to pay yourself a salary.

By doing so, you could:

• Earn a reliable wage that helps you build personal wealth over time
• Build up your State Pension eligibility
• Reduce your business’s Corporation Tax bill, as employer NICs and salary payments are usually tax-deductible
• Make pension contributions more easily (more on this in the next section).

If you are considering paying yourself a salary, ensure you pay attention to your Income Tax liability and budget accordingly.

2. Make regular pension contributions

To make your salary more tax-efficient and build wealth for your retirement, making monthly pension contributions is considered a positive move for business owners.

For instance, if you pay yourself £60,000 a year, the amount over £50,270 would normally be subject to higher-rate (40%) Income Tax. But if you place £10,000 a year into your pension pot, you’ll no longer pay any higher rate Income Tax, keeping your entire salary within the basic-rate (20%) tax band and putting valuable funds away for the future simultaneously.

More commonly, business owners would pay themselves a lower salary, plus dividends (more on this later), and make pension contributions from the business as employer contributions.

Remember, your pension contributions are eligible for basic-rate (20%) Government tax relief at source. And, if you’re a higher- or additional-rate taxpayer, you can claim tax relief at your marginal rate through self-assessment or tax code adjustment for higher rate taxpayers.

With your contributions and Government tax relief setting you up for retirement, you may rely less on a successful business sale to fund your later-life plans.

3. Run appropriate expenses through your company

If you have personal expenses, known as “allowable expenses” related to your work, you could run these through your company in order to reduce your Corporation Tax bill and hold onto more of your personal wealth.

Corporation Tax is charged at different rates depending on a company’s profit margins. For instance, as of 2024, companies with profits under £50,000 pay Corporation Tax at 19%, whereas companies with more than £250,000 a year in profits pay the “Main Rate” of 25%. Those in between these two thresholds normally pay 25% with the Marginal Relief Rate applied.

What’s more, if you would normally rely on personal finances to fund work-related expenses, putting these through the company could reduce your outgoings.

Allowable expenses must be “wholly and exclusively” for business use, according to HMRC. These might include:

• Clothing and other accessories
• Train and air travel expenses
• Pension contributions and NICs
• Health checks related to work, such as an eye test
• An annual office party (within certain regulations)
• Company vehicles such as vans, bikes, tractors, or lorries
• Your own car, if you use it for work. This includes insurance, maintenance fees, and fuel used for work trips.

Ensuring you keep tabs on all allowable expenses could vastly reduce your tax bill and help you keep more of your personal wealth too.

4. Pay yourself dividends

As a shareholder of your business, you could choose to pay yourself dividends as part of your remuneration.

Doing so could reduce your Income Tax bill, as dividends are taxed separately to salaried income. What’s more, Dividend Tax is usually paid at a lower rate than Income Tax.

As of the 2024/25 tax year, the tax-efficient Dividend Allowance is £500. The rate at which you pay Dividend Tax depends on which Income Tax band(s) your dividends fall within when added on top of all your other income:

• If they fall within the basic-rate band, you pay Dividend Tax at a rate of 8.75%, compared to your Income Tax rate of 20% on other types of income.
• If they fall within the higher-rate band, you pay Dividend Tax at a rate of 33.75%, compared to your Income Tax rate of 40%.
• For additional-rate taxpayers, Dividend Tax is charged at 39.35%, compared to your Income Tax rate of 45%.

Working with a Financial Planner could help you work out whether taking some of your remuneration as dividends could be more tax-efficient than simply paying yourself a salary.

5. Sell your business when the time is right

Of course, selling your business at the end of your career, if you wish to, could be a great way to receive an injection of capital at the point of retirement.

Selling your shares in a business, or the entire business, could help to fund your later-life goals. Just be aware that you may be liable for Capital Gains Tax (CGT) on any profits you make.

The CGT Annual Exempt Amount is just £3,000 as of the 2024/25 tax year. And, in the Autumn Budget, Chancellor Rachel Reeves is expected to raise CGT in order to help fill the “£22 billion black hole” she says was left behind by the Conservatives.

With this in mind, if you plan to sell your business in the coming year or so, it may yet be unclear how much tax you’ll pay on the sale.

However, if you have spent time extracting wealth tax-efficiently over the course of many years, you may be less reliant on the sale of your business to provide your entire retirement fund.

Find out how financial planning could help you build personal wealth as a business owner

We understand that managing both your personal and company finances can be a challenge – and often, your personal wealth may be placed on the back burner.

Our Financial Planners are highly qualified experts in helping business owners like you extract wealth tax-efficiently over the course of your career.

Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate tax planning.