Does leaving the money in save me tax?
No. The tax follows the profit your company made, not the money you moved. If your company made £40,000 of profit and you left all of it in the business account, the bill is the same as if you had paid dividends out of that profit the day before the year ended.
Plenty of directors save up in the company account thinking the tax waits until they take it. It does not wait. The bill lands for the year the profit was made.
Why doesn't a dividend cut the bill?
A dividend is a share-out of profit, not a cost of earning it. Corporation Tax is charged on the profit the company made, and a dividend is paid out of that profit, so it can never be one of the costs that gets taken off first. HMRC will not let you count it as a business cost.
You can take dividends during the year, you do not have to wait for the year end or for the tax to be paid. But your company must not pay out more in dividends than the profit it has available, this year's plus any left over from earlier years, and it is worth leaving enough in the account to cover the tax bill when it lands.
A salary works the other way round. If your company puts you on the payroll and pays you a real wage, that wage is a cost of running the business, the same as paying anyone else. The employer National Insurance on top of it is a cost too. Both come off before the tax is worked out. (The company has to pay it for real, not write it down on paper, and the money has to actually reach you within nine months of the year end.)
Which mix suits you depends on your own income, and we cover that in Paying yourself: salary, dividends and the company tax angle.
My bank balance is nothing like my profit
Correct, and this trips people up more than anything else on this page. Two things pull the two figures apart.
Money customers owe you still counts. Do the work in February and get paid in May, and that sale belongs to the year you did the work. It is in your profit even though the cash was not in the bank at year end. It works the other way round too: money a customer pays you up front for a job you have not done yet is not profit until you do it.
Buying equipment is not a straight deduction. A laptop, a van or a machine leaves your bank account in one lump, but for tax it goes through its own set of rules called capital allowances. Most small companies still get the full cost off their profit, it just travels a different route. See Can I claim my laptop, van or equipment?
So a healthy bank balance can hide a small profit, and a thin bank balance can sit on top of a real one. Look at the profit figure, never the balance.
A worked example in pounds
Your company had a good year. Here is what happens for each way of taking the money.
| Sales for work done during the year | £90,000 |
| (of which still unpaid at year end) | £6,000 |
| Allowable running costs | £50,000 |
| Profit for the year | £40,000 |
| Corporation Tax at 19% | £7,600 |
That 19% is the rate for profits of £50,000 or less, and it assumes this is your only company.
Now the part people get wrong:
- You take nothing out and leave £40,000 in the company account. Tax bill: £7,600.
- You take £25,000 as dividends and leave £15,000 in. Tax bill: £7,600. Identical.
- The company pays you a £12,000 salary through payroll, on top of the £50,000 of costs in the table. That makes the costs £62,000, so the profit is £28,000 and the tax is £5,320. The employer National Insurance the company pays on that salary is another cost on top, so the profit and the tax come out a little lower again.
The £6,000 your customer has not paid yet is still in the £40,000. You are taxed on it this year.
Full step-by-step maths, including what happens above £50,000 of profit, is in How is Corporation Tax worked out?
So what does bring the bill down?
Real costs of running the business. Stock, wages, rent, insurance, software, work travel, professional fees, and the salary your company pays you. Every genuine cost comes off your income before the tax is worked out.
Moving money between the company account and your own account changes nothing about the tax the company owes. If you are thinking of borrowing from the company instead of paying yourself, read What's a director's loan, and why does it affect my tax? first, because that route has a charge of its own.
How SimpleReturns handles it
Connect your bank or upload a statement. We work out your income and your allowable costs, land on the profit figure, and show you the tax before anything is sent. You never have to guess whether taking money out changed the number. It did not.