Running a limited company gives business owners several ways of taking money from their business.

Salary and dividends are the most familiar, but they are not the only possibilities. The tax consequences can also be quite different, which means simply transferring money from the company bank account when you need it is rarely the best approach.

Taking a salary

A director can receive a salary through the company’s payroll.

Provided the salary is incurred wholly and exclusively for the purposes of the company’s trade, it will generally be deductible when calculating taxable profits. Depending upon the amount paid, however, Income Tax and National Insurance contributions may arise.

The appropriate salary level will depend upon individual circumstances, so there is no single figure that is right for every company director.

Paying dividends

Shareholders may also receive dividends.

Unlike salary, dividends are not deducted when calculating the company’s Corporation Tax liability. They are distributions of profits that have already been earned by the company.

Importantly, a company must have sufficient profits available for distribution before paying a dividend.

The necessary company procedures should also be followed and appropriate records maintained. Regularly transferring money from the company bank account and subsequently describing those payments as dividends can cause problems if insufficient distributable profits were available.

The shareholder may also have Income Tax to pay on dividends received.

What are the other options?

Depending upon the circumstances, there may be other ways of extracting value from the company.

For example, the company might make employer contributions to a director’s pension. These can be particularly attractive where the director does not require all the available funds for immediate personal expenditure, although pension contribution rules and allowances need to be considered.

The company can also reimburse legitimate business expenses paid personally by a director.

If a director previously lent money to the company, repayment of that loan would normally be treated differently from salary or dividends.

Watch the director’s loan account

Problems can arise when directors withdraw money without deciding what those payments represent.

If the amounts cannot properly be treated as salary, dividends, expenses or repayment of money previously introduced, they may create an overdrawn director’s loan account.

This can have tax consequences for both the company and director, particularly if the balance remains outstanding.

Watch out, changes underway

The rules governing how shareholders take money and other value from companies may also be changing. The government is currently consulting on modernising the taxation of company distributions, an area where much of the legislation has remained substantially unchanged since 1965. The review is considering, among other things, the distinction between income and capital payments to shareholders, reductions and repayments of share capital, company purchases of own shares, demergers, the interaction between distributions and loans to shareholders, and the Transactions in Securities anti-avoidance rules. It also considers whether the tax treatment of distributions from non-UK companies should be brought more closely into line with that applying to UK companies. The consultation is particularly relevant to owner-managed and other close companies and closes on 14 September 2026. No final changes have yet been decided, but company owners considering significant withdrawals, share reorganisations or capital transactions should take advice before acting.

Review your strategy

The most appropriate way to take money from a company depends upon several factors, including profits, other personal income, cash requirements, pension plans and the circumstances of other shareholders.

It is therefore worth reviewing the position rather than automatically repeating whatever was done last year.

It is one of the more frustrating situations for a business owner.

Sales are increasing, everyone seems busy and there is plenty of work coming through the door. Yet the bank balance does not seem to improve, and, in some cases, cash becomes even tighter as the business grows.

The problem is that increasing sales does not necessarily mean increasing profits or cash.

Start with your profit margin

Suppose a business sells something for £100 that costs £60 to provide. The £40 difference contributes towards overheads and ultimately profit.

If the cost increases to £70 but the selling price remains £100, the business is still generating exactly the same turnover from each sale, but its margin has fallen from £40 to £30.

The business now needs considerably more sales simply to produce the same level of profit.

This can easily happen when wages, materials, subcontractor costs, energy and other expenses increase gradually but selling prices remain unchanged.

Are all your customers profitable?

Another common problem is assuming that all sales are equally valuable.

One customer may be straightforward to service and pay promptly. Another paying exactly the same price might require additional meetings, telephone calls, revisions and administration, and then take two months to pay.

The turnover figures may look identical, but the profitability of the two customers could be quite different.

The same principle applies to individual products and services. Knowing which parts of the business produce the best margins can help management decide where future effort should be directed.

Growth can consume cash

Rapid growth can also create its own cash flow problems.

A growing business may need additional employees, equipment or stock before it receives payment from customers. VAT, PAYE and other liabilities may also increase.

The result can be the strange situation where the accounts show a profitable and growing business while its bank account remains under constant pressure.

This is why profit and cash need to be monitored separately.

When did you last review your prices?

Businesses sometimes increase prices only when rising costs leave them with little alternative.

Regular small increases may be easier to manage than waiting several years and then needing a substantial increase simply to restore margins.

It is also worth considering whether every customer should necessarily receive the same percentage increase.

Look beyond turnover

Turnover is important, but it tells only part of the story.

Regular management information can show whether gross margins are improving or deteriorating, which costs are increasing and whether additional sales are actually producing additional profit.

If your business is busier than ever but the financial rewards do not seem to reflect the additional work, speak to your accountant.

A review of your margins, costs, pricing and cash flow may reveal where the money is going and, more importantly, what you can do about it.