Extracting Profits Tax-Efficiently: Strategies for 2026/27
Excerpt:
With dividend tax rates rising from 6 April 2026 and Corporation Tax thresholds tightening, owner-managed businesses must rethink profit extraction. Discover salary vs dividends, pension contributions, and other tactics to minimise tax leakage before the new rules bite.[Learn more in our comprehensive Director Salary vs Dividends 2026 Strategy Guide.]
Introduction: Why Profit Extraction Matters Now More Than Ever
Rising taxes on dividends, Capital Gains Tax (CGT), and frozen allowances mean business owners face higher costs for taking profits out of their companies. From 6 April 2026, dividend tax rates increase by 2% for basic (to 10.75%) and higher rate taxpayers (to 35.75%), while the Dividend Allowance stays at just £500.[2][3][10] Corporation Tax hits 26.5% effectively for profits between £50,000 and £250,000 due to marginal relief.[4]
These changes narrow the gap between income and capital treatments, making pensions and hybrid strategies more appealing. Tailor your approach to your profits, tax band, and goals—professional advice is essential as rules evolve.[1][6]
Salary vs Dividends: The Classic Debate in 2026/27
Dividends remain popular for their lack of National Insurance Contributions (NICs), but higher rates erode their edge. Compare options below:
| Method | Pros | Cons | Key 2026/27 Change |
|---|---|---|---|
| Salary | Builds state pension entitlement; pensionable earnings; deducts from Corporation Tax. Optimal at £12,570 (personal allowance).[6][8] | Triggers employer/employee NICs above thresholds; higher income tax rates. | No major rate hikes, but NIC relief via Employment Allowance. |
| Dividends | No NICs; from post-tax profits at lower rates than salary. | Taxed at 10.75% (basic), 35.75% (higher) from April 2026; £500 allowance only.[3] | +2% rates make it costlier—accelerate payments pre-6 April 2026.[4] |
Example: Extracting £6,000 as dividends incurs £645 tax (10.75%) with no Corporation Tax relief. Alternatives like interest on director loans save £1,500 net via 19-26.5% relief, despite 20% withholding (offsettable).[1] Always link to our Director Salary vs Dividends 2026 Strategy Guide for calculators and scenarios.
Pension Contributions: The Standout Tax-Efficient Choice
Employer pension contributions top the list for efficiency:
- Full Corporation Tax and NIC relief for the company.
- Tax-free growth; 25% lump sum tax-free on withdrawal.
- Maximise for directors and family—unaffected by most Budget changes until 2029.[2][3][5]
Pensions shine as dividend/savings taxes rise, though note Inheritance Tax on unused funds from April 2027.[3] Aim to max contributions alongside a minimal salary for state benefits.[6]
Alternative Strategies to Minimise Tax Leakage
- Director Loan Interest: Charge market-rate interest (deductible for Corporation Tax); net saving after 20% withholding.[1]
- Rent on Assets: Charge for personally owned premises—taxed as property income but extracts value.[2]
- Capital Allowances & Expenses: Claim £1m Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), and Structures & Buildings Allowance to cut taxable profits.[4][5]
- R&D Claims & Investments: EIS/SEIS/VCTs offer income tax relief and CGT exemptions.[5]
- Liquidation or Striking Off: For low-reserve companies (<£25k), achieve CGT treatment (14% with BADR pre-April 2026) cheaper than dividends.[1][4] Annual Exempt Amount: £3,000 tax-free.[1]
| Scenario | Best Option | Estimated Saving |
|---|---|---|
| Profits £50k-£250k | Pensions + low salary | Up to 40-50% effective relief. |
| Closing business | Informal striking off | Avoids liquidator fees vs dividends. |
| Overdrawn loans | Clear via dividends pre-rate hike | Mitigates 35.75% s455 tax.[3] |
Actionable Steps Before 5 April 2026 Year-End
- Review remuneration: Crunch salary/dividend numbers for your band.
- Accelerate dividends or BADR disposals at current rates.
- Maximise pensions and deductions (AIA, R&D).
- Check associated companies for Corporation Tax bands.
- Clear director loans to dodge s455 tax hikes.[3][4]
Final Thoughts: Personalise Your Strategy
No one-size-fits-all—factor your full tax position, profits, and timing. With changes like CGT to 18% under BADR, blending salary, dividends, and pensions often wins.[1][2] Contact Cheshire Business Accountants for bespoke modelling.
Tags: profit extraction, tax-efficient profits, salary vs dividends 2026, pension contributions, director tax planning, Corporation Tax 2026, dividend tax rise
Category: Tax Planning
Sources
- https://www.veritas-ats.co.uk/insights/profit-extraction-strategies-for-ombs-in-2026-27
- https://albertgoodman.co.uk/insights/profit-extraction-in-2026-and-beyond-all-change
- https://www.rousepartners.co.uk/director-shareholder-profit-extraction/
- https://teamsas.co.uk/year-end-tax-planning-2026/
- https://www.taxdriven.co.uk/guides/business-tax-planning-tips-for-2026/
- https://www.taxinsider.co.uk/tax-articles/extraction-of-profits-in-a-taxefficient-manner
- https://www.saffery.com/insights/articles/2025-26-year-end-tax-planning-guide-for-individuals/
- https://riseaccounting.co.uk/most-tax-efficient-way-to-pay-yourself-as-a-director/
- https://hlca.co.uk/resources/tax-planning-in-2026-27/
- https://baranovassociates.co.uk/dividend-tax-rates-rising-in-april-2026-what-does-it-mean-for-profit-extraction/
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