Can I Take Money Out of My Company Tax Free?

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We wrote this guide for people running a company who want clear answers on tax, payroll, Companies House filing duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

Introduction

This is one of the most common questions I am asked as a chartered accountant and company owner, and it is completely understandable. You have built a limited company, the business is making money, there is cash in the bank, and the natural question is whether you can take some of that money out without handing a chunk straight over to HMRC.

In my experience, the confusion usually comes from mixing up company money with personal money, or from hearing half truths like “dividends are tax free” or “just repay your loan”. The reality is more nuanced, but there are legitimate ways to extract money from a company with little or sometimes no personal tax, if it is done properly and supported by the correct accounting treatment.

In this article, I am going to walk you through the main ways you can take money out of your limited company, explain which ones can be tax free or tax efficient, and highlight the traps that cause problems with HMRC. I will explain this from a real world UK perspective, based on how HMRC actually looks at these transactions, not theory.

By the end, you should understand what is genuinely tax free, what is merely tax efficient, and what can land you with unexpected tax bills if you get it wrong.

A key starting point: company money is not your money

Before we get into specific methods, I want to make something absolutely clear, because it underpins everything else in this article.

A limited company is a separate legal entity. That means the money in the company bank account belongs to the company, not to you personally, even if you are the sole director and shareholder.

Every time money leaves the company, it must fall into a recognised category, such as salary, dividends, expense reimbursement, or loan repayment. If it does not, HMRC will often treat it as taxable income by default.

This is why good bookkeeping and clear records matter so much. When I review director accounts that have been run badly, most tax problems come down to money being taken informally without understanding how it should be classified.

What does “tax free” really mean in practice

When clients ask me if they can take money out tax free, I always clarify what they mean by that phrase.

There are three different interpretations people usually have:

• No personal income tax
• No National Insurance
• No additional tax beyond what the company already pays

Some methods are genuinely tax free at a personal level, others avoid National Insurance but still involve income tax, and some simply shift the tax burden to the company instead.

I will be clear about which category each method falls into.

Claiming legitimate business expenses

One of the most straightforward and genuinely tax free ways to take money out of a company is by reclaiming business expenses that you have personally paid for.

If you incur a cost wholly and exclusively for business purposes and pay for it personally, the company can reimburse you. This is not income, it is simply the company paying you back money it owes you.

Examples include:

• Office supplies purchased personally
• Business travel costs
• Professional fees paid upfront
• Software subscriptions used for work
• Mileage for business journeys

When done correctly, these reimbursements are tax free and do not need to be reported as income on your Self Assessment return.

However, the key phrase here is “wholly and exclusively”. HMRC scrutinises expenses closely, and mixed personal use is one of the biggest risk areas.

For example, claiming a mobile phone contract can be tax free if the contract is in the company name and used for business. Reimbursing yourself for a personal contract with mixed use is much harder to justify and often leads to disallowed claims.

From an accounting point of view, these reimbursements are recorded as business expenses in the profit and loss account, reducing the company’s taxable profit.

Mileage allowances

Mileage is worth calling out separately because it is one of the most commonly misunderstood areas.

If you use your personal vehicle for business journeys, the company can pay you mileage at HMRC approved rates. These are currently:

• 45p per mile for the first 10,000 miles
• 25p per mile thereafter

These payments are tax free for you personally and deductible for the company, provided the journeys are genuinely for business and properly recorded.

I always advise clients to keep a mileage log showing dates, destinations, purpose of travel, and miles covered. Without this, HMRC can and does challenge claims.

It is important to note that ordinary commuting does not count. Travel from home to a permanent workplace is not business mileage in HMRC’s eyes.

Director’s loan account repayments

This is one of the most powerful and often overlooked tax free extraction methods, but only if it applies to your situation.

A director’s loan account arises when you lend money to your company, usually at start up or during periods of cash flow pressure. This might be personal savings used to fund the business, or expenses you paid personally before the company had money.

When the company later repays that loan, it is not income and it is not taxable. You are simply getting your own money back.

In practice, I see director’s loan accounts built up through:

• Initial share capital and start up funding
• Paying company expenses personally
• Using personal funds to cover VAT or PAYE shortfalls

The critical point is that the loan must be properly recorded in the accounts. HMRC will expect to see a clear loan balance and evidence of how it arose.

If your company owes you £15,000 through a director’s loan account, you can withdraw that £15,000 tax free, provided the company has the cash to do so.

This is one of the few genuinely tax free withdrawals available, but it only applies if you have previously put money in.

Interest on director’s loans

You can also charge your company interest on money you have lent it. From the company’s perspective, this interest is an allowable expense, reducing corporation tax.

From your perspective, the interest is taxable income, but this is where allowances can come into play.

If the interest you receive falls within your personal savings allowance, it may be taxed at 0 percent. For basic rate taxpayers, this allowance is currently £1,000 per year.

However, interest must be properly documented, and in some cases the company may need to withhold basic rate tax at source. This is an area where I always recommend specific advice, as errors are common.

Salary within the personal allowance

Paying yourself a salary is not tax free in the purest sense, but it can be structured to be very tax efficient.

Many directors pay themselves a salary up to the personal allowance threshold. This means no income tax is payable personally.

Depending on the level chosen, there may also be little or no National Insurance due, particularly if the salary is set at the lower earnings limit or primary threshold.

From the company’s point of view, salary is an allowable expense, reducing corporation tax. Employer National Insurance may apply above certain thresholds, but this is often outweighed by the corporation tax saving.

In practice, I often recommend a modest salary combined with dividends, rather than relying on salary alone.

Dividends and the dividend allowance

Dividends are not tax free in the way many people believe, but they do benefit from a dividend allowance.

Each individual has a dividend allowance, meaning a portion of dividends received each tax year is taxed at 0 percent. Above that, dividends are taxed at rates lower than salary income.

Dividends are paid from post tax profits, so corporation tax must be paid first. However, there is no National Insurance on dividends, which is why they remain popular.

To pay dividends correctly, the company must:

• Have sufficient distributable profits
• Declare the dividend properly
• Issue dividend vouchers
• Record the transaction correctly in the accounts

Taking dividends without profits or without paperwork is one of the fastest ways to attract HMRC attention.

Pension contributions made by the company

Company pension contributions are one of the most tax efficient ways to extract value from a business, even though the money does not go straight into your pocket.

Employer pension contributions are:

• Not subject to income tax for you
• Not subject to National Insurance
• Deductible for corporation tax

This makes them incredibly powerful for long term planning.

There are annual allowance limits to be aware of, and the contribution must be wholly and exclusively for business purposes, but in practice HMRC is generally supportive of reasonable pension planning.

I often recommend this route to directors who do not need all the cash immediately and want to build tax efficient retirement funds.

Trivial benefits and staff perks

Directors can receive certain small benefits tax free, provided strict rules are followed.

Trivial benefits must:

• Cost £50 or less per benefit
• Not be cash or a cash voucher
• Not be a reward for work done
• Not be part of a contractual entitlement

For directors of close companies, there is an annual cap on the total value of trivial benefits.

Examples include small gifts, birthday meals, or modest seasonal treats. While this will not extract large sums, it is still a legitimate tax free benefit when used correctly.

Capital distributions on company closure

If you are closing your company, it may be possible to extract remaining funds in a tax efficient way through capital treatment rather than income.

This is a complex area involving distributions, capital gains tax, and potentially Business Asset Disposal Relief. It is not always tax free, but it can be significantly more tax efficient than taking income.

This is an area where professional advice is essential, as getting it wrong can result in income tax rates being applied instead.

What not to do: taking money informally

One of the biggest mistakes I see is directors simply transferring money from the company to their personal account without understanding how it should be treated.

If HMRC cannot clearly identify what a withdrawal represents, they may treat it as:

• Salary subject to PAYE and National Insurance
• A dividend without proper declaration
• An overdrawn director’s loan

An overdrawn director’s loan can trigger additional tax charges for the company and personal tax consequences for the director, particularly if it is not repaid within the required timeframe.

This is why regular bookkeeping and monthly reviews are so important.

How HMRC looks at these arrangements

HMRC does not object to directors paying themselves efficiently. What it objects to is poor records, inconsistent treatment, and arrangements that lack commercial reality.

When reviewing a company, HMRC will look at:

• Accounting records and bank statements
• Director’s loan movements
• PAYE submissions
• Dividend paperwork
• Expense claims and receipts

If everything is consistent and properly documented, tax efficient extraction is usually accepted.

Bringing it all together

So, can you take money out of your company tax free?

In some cases, yes, particularly through:

• Reimbursing genuine business expenses
• Repaying director’s loans
• Mileage allowances
• Certain small benefits

Other methods are not truly tax free, but they are tax efficient when structured correctly, such as salaries within allowances, dividends, and pension contributions.

In my professional opinion, the biggest risk is not paying too much tax, it is paying the wrong type of tax because money has been taken out without understanding how it should be treated.

If you take one thing away from this article, let it be this: there is no single “best” method for everyone. The right approach depends on your profits, personal circumstances, cash needs, and long term plans.

Getting this right can save thousands over time. Getting it wrong can be very expensive.

If you are unsure how money has been taken out of your company, or you want to plan future withdrawals properly, it is always worth reviewing this with an accountant who understands both the tax rules and the commercial realities of running a business.

You may also find our guidance on What happens if my Director’s Loan Account is overdrawn and How do I pay Corporation Tax for my company helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.