What Expenses Can Company Directors Claim?
Take a director with £45,126 of profit left after Corporation Tax. Pay all of it out as a dividend this year, and £6,654 goes in personal tax. Pay out just £37,700 and leave the rest where it is, and the tax drops to £3,999. That's a difference of £2,655 on the last £7,426 alone. It works out at 35.75p in every pound.
Now here's the interesting part. Whether leaving that £7,426 behind actually saves you money depends on what you do with it next. Used well, it's a clever bit of planning. Used badly, it's just money sitting idle, or worse, money that quietly leaks back out through a director's loan account and attracts a tax charge of its own.
I've had this conversation with company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider South East more times than I can count. "Should I take it all out?" is nearly always the first question. "Should I leave some in?" is usually the better one. This guide should help you work out which applies to you.
Let's start with the basics. When your company makes a profit and pays Corporation Tax on it, what's left belongs to the company. It doesn't become yours until you take it out, by way of dividends, salary, pension contributions or another route. Until then, it sits on the company's balance sheet as retained profit.
There's no rule that says you must pay it out. Plenty of well-run companies hold most of what they earn. The question is whether there's a good reason to do so.
The first and most practical reason is simple safety. Every business has bad months. A client pays late. A contract ends sooner than expected. The van fails its MOT in the same week as a big tax bill arrives.
A contractor I worked with in Tunbridge Wells used to take out almost everything his company earned, month after month. It felt sensible. The money was his, after all. Then a project finished three weeks early, the next one was delayed by two months, and the company had nothing to cover his salary, its software subscriptions or the VAT bill. He ended up putting a few thousand pounds on a credit card at a high rate of interest. A modest cash buffer would have cost him nothing.
So how much is enough? There's no single answer, but here's a rule of thumb I use with clients. Add up your fixed monthly costs: your own salary, rent, insurance, software, loan repayments and the like. Multiply by three to six months, depending on how predictable your income is. Then add any tax bills you know are coming, such as Corporation Tax, VAT and PAYE. A freelancer with long contracts and steady clients might get by on three months. A seasonal business, like a hospitality venue or a farm shop, may need considerably more.
Your Corporation Tax bill deserves special mention. It's due nine months and one day after your year-end, and it's easy to spend money that's already spoken for. Setting aside that money as you go, in a separate account if possible, is one of the simplest things you can do.
The second reason to keep profit is to put it back into the business. This is usually where retained profit works hardest.
A joinery firm in Tonbridge, run by two brothers, held back most of their profit for two years. Then they bought a CNC machine that cut their production time by a third. They paid for it without borrowing a penny. If they'd taken that money out as dividends first, they would have paid personal tax on it, then had to find the cash again, probably from a lender.
Spending on equipment, vehicles and other qualifying assets may also attract tax relief. The Annual Investment Allowance lets most businesses deduct up to £1 million of qualifying spending from their profits, and companies can claim full expensing on certain new plant and machinery. These rules have their own conditions, so check the current position before you buy. But the principle is clear: money invested in the business can reduce the Corporation Tax bill as well as improve the business.
It isn't only about machinery. Retained profit can fund a new hire, a better website, training, stock, a move to larger premises or the deposit on a unit. It can also pay off expensive debt. A company that clears a loan charging 9% has effectively earned 9% on that cash, with no tax on the saving.
The third reason is growth, and it sits close to investment. A business that wants to grow nearly always needs working capital first. You pay your suppliers and staff before your customers pay you. The faster you grow, the bigger that gap becomes.
Retained profit is the cheapest funding there is. It carries no interest, no security and no lender watching over your shoulder. It also makes borrowing easier when you do need it. Banks, landlords and larger customers look at your balance sheet. A company with healthy retained reserves looks stable. A company that has paid out everything it earns, however profitable, can look thin.
Retained profits also help when you want to tender for larger contracts. Many procurement teams ask for evidence of financial strength, and a strong balance sheet is part of the answer. For a growing firm in Kent competing for work with councils, housing associations or larger corporate clients, that can matter more than people expect.
I don't want to give the impression that more is always better. Leaving profit in the company has downsides, and I'd be doing you a disservice if I skipped them.
First, idle cash earns very little. Interest on a business account is usually modest, and it's taxed as company income. Money that could be working in your pension, your mortgage or your home life is, for now, doing none of those things.
Second, company money is exposed to the company's risks. If the company is sued or becomes insolvent, retained cash is available to its creditors. Money you've already taken out, and used properly, is outside that net.
Third, a growing pile of cash can tempt you into informal withdrawals. A transfer here, a personal payment there. These end up on your director's loan account, and an overdrawn balance at the year-end that isn't cleared in time triggers a section 455 charge of 35.75% on loans made from 6 April 2026. I've written a separate guide on director's loan accounts, and it's worth reading alongside this one.
Fourth, large cash balances can affect valuable tax reliefs on a future sale or on inheritance, which I'll come to shortly.
Let's clear up a common misunderstanding. Leaving profit in the company doesn't avoid Corporation Tax. The company pays it on its profits whether you take the money out or not. The rates for 2026–27 are 19% on profits up to £50,000, 25% above £250,000, and a sliding scale between the two, which produces an effective rate of 26.5% on the profits that fall in that band.
What retention affects is the second layer of tax, the one you pay personally when you take the money out. That's the layer you can influence.
Since 6 April 2026, dividend tax is 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above £125,140, with a £500 tax-free allowance. For a director with a £12,570 salary and no other income, the first £37,700 of dividends, which includes the £500 allowance, sits in the lower band. Anything above that is taxed at 35.75%.
That 25-point gap between the bands is the whole story. If you can arrange your affairs so more of your dividends fall in the lower band, you pay less tax overall. Retaining profit lets you do exactly that, by smoothing your extractions across several years rather than taking them in one lump.
Here is the example I mentioned at the start, with the working shown. Imagine a sole director whose company makes £70,000 of profit before any director pay. The company pays the director a £12,570 salary, which costs about £1,136 in employer National Insurance. That leaves £56,294 of profit. Corporation Tax, allowing for marginal relief, comes to £11,168. That leaves £45,126.
Take all of that as dividends, and the director pays £6,654 in dividend tax and keeps £38,472. Take only £37,700, and the tax is £3,999, leaving £33,701 in the director's pocket and £7,426 in the company.
The last £7,426 would have cost £2,655 in tax if taken this year, which is 35.75%. If the director takes it in a later year when the lower band is free, say a year with a lower income, a career break or after retirement, the tax on it would be about £745. That's roughly £1,910 less.
But, and this matters, the saving is only real if that lower band is actually free later. If you simply take the same size of dividends again next year, the band is already full, and the saving disappears. The same £7,426 pushed forward each year gets you nothing. Retention works best when you know a lower-income year is coming, or when you're willing to spread extraction deliberately over time.
An employer pension contribution sits somewhere between keeping money in the company and taking it out. It's deductible against Corporation Tax, it attracts no National Insurance and no income tax on the way in, and it builds wealth you will eventually draw. The annual allowance is £60,000, with the option of carrying forward unused allowance from the previous three years. If you're sitting on profits you don't need in the short term, a pension contribution is often a better home than leaving it in a business account.
Some directors build up cash and then put it in investments or property through the company. It can work, but there are traps. Interest and rental profits in the company are taxed at Corporation Tax rates. Gains on assets are taxed too, and the company doesn't get the personal capital gains exemption. A company that is mainly an investment business loses the small profits rate of 19% and pays the main rate instead.
There's a bigger consideration. If substantial non-trading activity builds up inside a trading company, it can put at risk reliefs such as Business Asset Disposal Relief and Business Relief for inheritance tax. Both depend on the company being a genuine trading business. Money invested outside the trade, rather than put to work within it, may count against you.
If you sell your shares or close the company down in an orderly way, retained profits are usually taxed as capital rather than as income. From 6 April 2026, Business Asset Disposal Relief reduces the rate of Capital Gains Tax to 18% on qualifying gains, up to a lifetime limit of £1 million. That is well below dividend rates. For directors planning an eventual exit, that can make retained profit a reasonable long-term plan.
The conditions are strict, though. You need to meet ownership and holding-period tests, and the company must be a trading company. Winding up a company to take out its reserves also has anti-avoidance rules attached, so this is a decision for a conversation with your accountant, not a do-it-yourself project.
For family business owners in Kent, there's a further point. Business Relief can reduce inheritance tax on a trading company's shares, but cash and investments that aren't needed for the business may be treated as "excepted assets" and may not qualify. From April 2026, there is also a £2.5 million cap per estate on 100% relief, with 50% relief above it. A company holding large surplus cash can sit awkwardly in that picture.
Quick answer: Often yes, but not by default. Retain what the business genuinely needs for safety, investment and growth, and extract the rest in a planned way that makes full use of your lower tax bands. Leaving everything in the company with no plan is rarely the best option, and neither is taking out every pound.
What this means for a company director: Corporation Tax is payable whether you retain profit or not, so the real decision is about when you pay personal tax on it. Retention can let you smooth your income across years and keep more of your dividends in the 10.75% band. But money left in the company is exposed to company risks, earns little, and has to be handled carefully if you plan to draw it later.
Example: A sole director's company has £45,126 left after Corporation Tax. Taking it all as a dividend costs £6,654 in personal tax. Taking £37,700 and leaving £7,426 in the company costs £3,999 now. The retained £7,426 costs about £745 to extract in a later year with the lower band free, compared with £2,655 this year, a saving of around £1,910. If the band isn't free later, the saving vanishes.
Common mistakes: Taking everything out by habit; leaving everything in with no purpose; using the company account for personal costs and creating an overdrawn director's loan; ignoring the effect of large cash balances on reliefs; and assuming that what suited another director will suit you.
When should you speak to an accountant? Before your year-end, while you can still adjust. Also whenever your income changes, whether through a new contract, a new employee, a house purchase, a career break or the early stages of planning for retirement.
Everything so far might sound as though I'm arguing for leaving money in. I'm not. There are plenty of occasions when taking it out is the right call.
Personal life doesn't stop for tax planning. A mortgage, school fees, a wedding, a family holiday and a new kitchen all need real cash. If your personal spending outstrips your salary, you need a regular, tidy way to extract money, and a planned dividend is much better than a series of unrecorded transfers.
Every year, your personal allowance, the £500 dividend allowance and the 10.75% band are available once. If you don't use them, they're gone for good. A director who consistently leaves the lower band empty is giving up tax-efficient income. Even if you don't need the cash, taking dividends up to the top of the basic rate band each year is often sensible, and the money can then go into a pension, an ISA, or your mortgage.
I'd put this as a general principle: extract enough each year to use your lower bands, and be more cautious about pushing into the 35.75% band unless you need to.
If your reserves have grown far beyond any foreseeable need, the balance may be doing more harm than good. A company holding £300,000 of cash it will never use is carrying risk without purpose, and may be putting valuable reliefs under strain. At that point, a considered plan to extract gradually, invest in the business or contribute to a pension makes much more sense than letting it sit.
If you're within a few years of selling or stepping back, it's time to look carefully at your cash. Do you extract it before the sale, and pay dividend tax? Do you leave it in and price it into the deal? Do you wind up the company and take the reserves as capital with Business Asset Disposal Relief? The right answer depends on your circumstances and the buyer's, and getting it wrong can cost five figures.
If your director's loan account is overdrawn, a dividend declared against the balance is often the cleanest way to settle it, provided there are enough distributable profits. In that case, extraction is a way to avoid a section 455 charge.
In companies with more than one shareholder, retention is rarely just a tax decision. A brother who wants dividends to pay his mortgage and a sister who wants to reinvest need a conversation. Their rights, and the terms of any shareholders' agreement, matter here. I've seen family businesses in Kent argue for years over dividend policy, simply because nobody had put it in writing.
If you're not sure where you stand, these five questions will get you most of the way there.
Write the answers down. Review them every year, ideally a couple of months before your year-end, when there's still time to act.
Deciding how much to keep in your company and how much to take out is one of the most valuable conversations we have with company directors. At Peter Hodgson & Co, we look at your profits, your personal needs, your plans and your tax position together, and give you a clear, practical answer based on your own numbers.
If you're a director in Tunbridge Wells, Tonbridge, Sevenoaks or anywhere else in Kent and the South East, we'd be glad to help. You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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