Tax-Efficient Profit Extraction Planning and Strategies in 2025?

Introduction: Why Profit Extraction Matters More in 2025

With continued cuts to the dividend allowance and rising personal tax pressure, business owners in 2025 face more complexity — and opportunity — when deciding how to extract profits from their companies.

The question we’re hearing more than ever is: “What’s the most tax-efficient way to pay myself in 2025?”

At RJP LLP, we help owner-managed businesses find tailored solutions that balance short-term tax efficiency with long-term planning goals. Here’s our expert take on the most effective strategies this year.

1. The Classic Mix: Salary and Dividends

Using a blend of salary and dividends remains a core tax strategy — but with adjustments required in 2025:
• Salary is subject to income tax and NICs but is deductible for corporation tax purposes and builds state pension entitlement.
• Dividends are taxed at lower rates but are paid from post-tax profits and are not deductible by the company.

2025 Snapshot:

Remuneration Type: 1. Salary ; consists of PAYE + NICs ; Tax position – Up to 45% ; Reduces company profits (CT relief).

Remuneration Type 2: Dividends to shareholders ;  taken after  CT paid ; Tax position – 8.75% to 39.35% ; £500 allowance.

Optimal strategy:

Take a salary up to the NIC threshold (£12,570), then extract further profits as dividends — unless pension or other options are more suitable.

2. Pension Contributions: Often Overlooked, Still Powerful

Company-funded pension contributions remain one of the most tax-efficient profit extraction methods:
• No income tax or NICs for the individual
• Deductible from company profits (up to HMRC’s “wholly and exclusively” test)
• Up to £60,000 annual allowance (plus carry-forward from 3 previous years)

In 2025, many business owners are revisiting pension planning to offset rising income tax bills — especially those in the higher and additional rate brackets.

Tip: Pension contributions can be especially valuable for older directors nearing retirement or for exit planning.

3. Director Loans: Short-Term Option, With Caution

If structured correctly, director loan accounts (DLAs) can offer short-term liquidity without immediate tax — but they must be repaid or taxed:

• Loans outstanding 9 months after year-end are taxed at 33.75% on the company (Section 455 charge)
• If interest isn’t charged, benefit-in-kind (BIK) rules may apply
Best used as a cashflow tool — not a long-term extraction method. The tax cost of non-repayment can outweigh the benefits if not monitored carefully.

4. Director Loans: Short-Term Tools — and Interest Opportunities

If you’ve lent money to your company (rather than borrowed from it), your director’s loan account (DLA) becomes a valuable asset — and an opportunity for tax-efficient income extraction.

If you have a positive DLA balance (i.e., the company owes you), you can charge the company commercial interest on the loan.

• The interest is deductible for corporation tax
• The company deducts tax at basic rate on payment of the interest and pays it to HMRC quarterly
• You are taxed on the gross interest as savings income (20%/40%/45%), with a credit for the basic rate tax deducted
• You may also benefit from the £500 savings allowance (basic rate taxpayers)
• No NICs apply, making it more efficient than salary

5. Charging Rent: Director-Owned Property

If you personally own the premises used by your business, charging commercial rent can be an effective profit extraction method:

• Rent is tax-deductible for the company
• You pay income tax on the rent (but no NICs apply)
• You retain ownership of the asset outside the company

Planning points:

• Ensure rent is at market value to avoid disputes with HMRC
• Consider long-term CGT/IHT implications of holding property personally vs in a company
• This method also helps protect the asset from company risks

6. Bonus Payments: Not Always the Best Option

While bonuses are fully deductible for corporation tax, they trigger full PAYE and NIC costs — often making them less attractive for small business owners compared to dividends or pensions.
However, in some cases, such as R&D claim maximisation or profit smoothing, bonuses can be a smart short-term move.

7. Alternative Strategies to Consider

Some additional options for tax-efficient profit extraction include:
• Spouse income splitting (where shares or salaries are used legitimately to spread income)
• Capital reduction and share buybacks for retiring or exiting directors
• Use of family trusts (particularly where assets or income are intended for adult children or for grandchildren)

These approaches require personalised advice and careful implementation to ensure compliance with anti-avoidance legislation.

Why Now? Timing Matters More Than Ever

With:
• Dividend allowances falling
• Annual pension allowances and marginal tax rates tightening
• New reporting requirements for director loans and benefits
…it’s more important than ever to take a holistic approach to profit extraction. What worked in 2020 may now trigger unintended tax consequences in 2025.

How RJP LLP Can Help

We provide specialist advice to help directors and shareholders extract profits efficiently, sustainably, and in a way that aligns with long-term business and personal goals.

Our team works closely with clients to:
• Model tax scenarios
• Design profit extraction strategies tailored to your income needs
• Navigate HMRC compliance, payroll, and pension rules
• Support year-end planning and proactive tax optimisation

Speak to Us Today

Want to review your 2025 profit extraction strategy?

📞 Call RJP LLP today on 020 8290 0088
📧 Or email us at partners@rjp.co.uk to arrange a free consultation.

Make 2025 your most tax-efficient year yet.