The default extraction route — salary and dividends — is the most expensive one available. Here is what a structured extraction of £500,000 looks like and what it costs.

If you extract £500,000 from your trading company as a combination of salary and dividends in a single tax year, the tax cost is approximately £195,000 to £215,000 depending on your other income. That is an effective rate of 39% to 43%.

This is not the result of doing something wrong. It is the result of using the default extraction route, the one your accountant sets up when you incorporate, and the one that most founders use for their entire career without questioning it.

What the default route looks like

The standard approach: salary at £12,570 (the personal allowance), dividends for the remainder. On £500,000 total extraction, approximately £487,430 is taken as dividends. The first £500 is tax-free (the dividend allowance). The next £37,200 is taxed at 8.75% (basic rate). The remaining £449,730 is taxed at 33.75% (higher rate). Total dividend tax: approximately £155,000. Plus the salary NIC and income tax on the salary element. Total extraction cost: approximately £158,000 to £165,000 in personal tax.

The company has already paid 25% corporation tax on the profits before they were distributed. The combined effective rate on profits extracted this way is approximately 48% to 52%.

What a structured extraction looks like

Pension contributions. An employer pension contribution of £60,000 (the annual allowance) is a corporation tax deductible expense. It does not count as personal income. The company saves £15,000 in corporation tax on the contribution. You receive £60,000 into a pension without paying personal tax. Effective cost of extracting £60,000: £0 in personal tax, £45,000 net cost to the company after the corporation tax saving.

Holding company retention. Profits retained in a holding company are taxed at 25% corporation tax. They are not extracted personally until you choose to extract them. £200,000 retained in a holding company costs £50,000 in corporation tax. The same £200,000 extracted personally costs approximately £67,500 in dividend tax. Annual saving: £17,500.

Spouse dividend. If your spouse holds shares in the company (or the holding company) and is a basic-rate taxpayer, dividends paid to them are taxed at 8.75% rather than 33.75%. On £50,000 of dividends redirected to a basic-rate taxpayer spouse, the saving is £12,500 per year.

Capital distributions. On a winding up or share buyback, distributions may be treated as capital gains rather than income. CGT at 24% (or 18% with BADR) is lower than dividend tax at 33.75%. For founders who have accumulated significant retained profits, a planned capital distribution can be significantly more tax-efficient than ongoing dividend extraction.

What a structured £500,000 extraction looks like

£60,000 employer pension contribution (£0 personal tax). £100,000 retained in holding company (£25,000 corporation tax, deferred). £50,000 dividend to basic-rate spouse (£4,375 tax). £290,000 personal dividend (£95,288 tax). Total personal tax: £99,663. Saving versus default route: approximately £65,000 per year.

The Capital Audit identifies the specific extraction architecture appropriate for your position and calculates the annual saving in real numbers.