If you run your business through a limited company, you’re likely paying tax twice, once inside the company, and once personally when you take the money out.
That stings. You work hard, take risks, deal with endless admin, and still end up losing a big chunk to tax before you even get your hands on it.
So, what can you do about it?
In this blog, I’ll walk you through a practical, fully legal strategy that we use every day to help trades business owners (including loads of plumbing and heating firms) get more of their company profits in their back pocket and less sent off to HMRC.
It’s what I call the Tax Funnel. We start with the easy wins and work our way down to the more tailored, situational methods. If you’re running a profitable business and you want to extract your money smartly, this will be worth your time.
Start at the top: free money (done right)
The top of the funnel is where the wins are easiest. We’re talking about turning things you’re probably already paying for into legitimate business expenses, so you don’t need to pay tax on the money before you spend it.
Here are some examples we regularly implement for clients:
- Your mobile phone – If your company takes out the contract and provides the phone, you can use it as much as you like and it won’t be taxed as a benefit. Just make sure it’s in the company name.
- Relevant life insurance – This isn’t just life cover, it’s a tax-efficient version for company directors. Paid by the company, fully allowable for corporation tax, and no benefit-in-kind tax on you personally.
- Trivial benefits – Think small gifts or vouchers under £50 each. As long as you stay within £300 per tax year and follow the rules, you can treat yourself (or your team) tax-free.
- Mileage claims – Using your personal vehicle for business journeys? Claim back 45p per mile for the first 10,000 miles (then 25p). It’s tax-free in your hands and a deduction for the company.
- Annual function – A company Christmas party, summer BBQ, or team-building event can cost up to £150 per person and still be tax-free, if you play by HMRC’s rules.
- Office at home allowance – If you’re working from home regularly, you can claim £6 a week (or more if you go down the actual costs route).
- Pension contributions – A big one. Employer pension contributions don’t count as your personal income, so you avoid income tax, and the company gets corporation tax relief.
These “free” methods aren’t loopholes or clever accounting tricks – they’re part of the UK tax code. And they add up fast. You’re effectively moving costs from your personal bank account to the companies, saving yourself income tax, National Insurance, and corporation tax along the way.
Next up: low-tax methods (salary and dividends)
Once you’ve taken advantage of the free options, it’s time to look at ways to take more money out at a low personal tax cost.
Here’s the playbook:
- PAYE salary – For most company directors, paying a salary between £6k and £12k a year is a sweet spot. It gives you a qualifying year for your state pension and creates a corporation tax deduction. If it stays under your personal allowance, you won’t pay income tax on it.
- Dividends – Still one of the most efficient ways to extract profit. No National Insurance, and you can make the most of your tax-free dividend allowance and basic rate bands. Dividends do get taxed, but the rates are usually lower than PAYE income.
- Electric cars or medical insurance – Sometimes the company paying for benefits like electric vehicles or private medical cover makes sense, depending on the tax treatment. It’s worth crunching the numbers.
- Entertaining prospects – Taking a potential client for lunch? The company can pick up the bill. You won’t be taxed on it personally, even if the company can’t claim a deduction.
- Interest on a director’s loan – If your company owes you money, it can pay you interest. There’s even a tax-free savings allowance that may apply to that interest.
Tailored options: the more specific stuff
This next part is more situation-dependent, but when used correctly, it can be powerful.
- Alphabet shares for your spouse – Giving your partner shares in the business means you can pay them dividends too, using their personal allowances.
- Employing your kids – Yes, really. If they do legitimate work (filing, washing vans, admin), you can pay them through the company. It must be reasonable and properly recorded.
- Director’s loans – The company can lend you up to £10,000 without any tax if it’s paid back on time. Combine this with dividend timing and it becomes very tax efficient.
These aren’t strategies to be used blindly. They must fit your situation, be done properly, and be well documented. But if you get them right, they can be a game changer.
So, what’s the strategy here?
You don’t need clever schemes or offshore accounts. What you need is structure.
The smart way to take money out of your limited company is to:
- Move personal expenses into the company where allowed
- Pay yourself a small salary
- Use dividends wisely
- Contribute to your pension
- Stay within HMRC’s rules and keep everything squeaky clean
When done right, this method works incredibly well for plumbing and heating businesses. It’s not about tax dodging, it’s about being efficient, strategic, and making sure more of your hard-earned money ends up with you, your family, and your business.
And most importantly, it keeps you out of HMRC’s firing line.
Final thought
If your goal is to run a tight operation and keep as much of your profit as possible, these are the tools to use. But knowing which ones apply to you, and how to use them together, takes experience.
Don’t get caught chasing every shiny scheme or overly complicated setup. Stick to the proven methods that work for trades businesses like yours.
If you would like to discuss this further, contact us at info@togetherwecount.co.uk