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A company can only pay a dividend if there are sufficient retained profits from which to pay the dividend. There are no such restrictions on the payment of a salary.

Salary payments are deductible for corporation tax and there is no restriction on the payments where this creates or augments a loss.

In formulating an extraction policy in this situation it is also necessary to take into account the way in which the loss is relieved. Carrying a loss back and setting it against profits of the previous year may generate a tax repayment, which may be valuable to the company.

Example:
During the year to 31 March 2015 the company makes a profit of £10,000 before paying the director/shareholder. The company has a negative balance sheet. As there are no retained profits, it is not possible to pay a dividend as hoped so instead the company pays the director a bonus of £40,000 (on which employer NICs are £4,400 ((£40,000 - £8,112) @ 13.8%). The director had not drawn a salary and it assumed that the employment allowance has been used up elsewhere.

Taking account of the bonus and NIC turns the profit into a loss of £34,400.

If the company had sufficient profits in the preceding 12 months to utilise the loss, carrying the loss back would generate a tax repayment of £6,880 (20% of £34,400).