How you extract your hard earned profits from your company will depend upon your level of income from other sources and the level of the company’s payroll due to other employees. The traditional method of profit extraction, assuming you have no other sources of income, has been to pay yourself up to the employee’s national insurance threshold which for 2014/15 is £7956 and anything above that would be taken as dividends. The idea being to ensure that as much of your personal allowance as possible is used to provide you with tax free income. Anything above the threshold would attract both employee and employer national insurance contributions which would exceed the tax payable on dividends, making it tax inefficient to do so.

However, from April 2014, all (or nearly all) employers are entitled to a £2000 employer National Insurance allowance. If your company has other employees, this allowance may well be used up by their salaries. However, if this is not the case, you should use this allowance to your advantage by paying yourself up to the income tax threshold of £10,000 rather than the employee’s national insurance threshold. There would be some employee’s national insurance to pay on this salary (£245) but this is outweighed by the 20% corporation tax saving on the additional salary. This therefore results in a net saving of £164.