How to take money out of a limited company in the UK
Limited companies are separate legal entities, meaning that the company owns its finances and assets, not the business owners. Therefore, withdrawing money from a limited company requires specific procedures. Below, we outline the different ways you can do this.
When running a limited company, you cannot freely withdraw funds from the business account at will. You must accurately record all company income and expenses, as well as account for business taxes, to determine the amount of profit available for withdrawal at any given time. It’s essential to maintain proper records to ensure compliance and make informed decisions on withdrawing money.
Four ways to take money out of a limited company
The four legal methods to withdraw money from a limited company are:
- As a director’s salary
- As dividend payments
- As a director’s loan
- By claiming allowable expenses
By strategically using a combination of these methods, a limited company can offer a highly tax-efficient way to operate a business and reduce personal tax and National Insurance liabilities. This is because a company’s taxable income (profits after costs and overheads) is subject to Corporation Tax, which is generally lower than the Income Tax rates applicable to sole traders.
The Income Tax rates are:
- 20% (basic rate) on taxable income above the £12,570 tax-free Personal Allowance up to £50,270
- 40% (higher rate) on taxable income between £50,271 and £125,140
- 45% (additional rate) on taxable income above £125,140
Director’s salary
Company directors, who often hold shares as well, usually receive a salary from their companies. For tax purposes, HMRC treats directors as employees, requiring companies to register for PAYE and pay employer National Insurance contributions (NIC).
The company deducts Income Tax and employee Class 1 NIC from the director’s salary and sends these payments to HMRC monthly or quarterly.
Since salaries and wages are tax-deductible expenses, companies can pay them before calculating Corporation Tax, avoiding taxes on that portion of income. As a director and shareholder, you can optimize your payments by:
- Taking a small salary up to the NIC primary threshold
- Supplementing your salary with dividends from shares
The NIC primary threshold is currently £1,048 per month (£12,570 per year), matching the Personal Allowance.
By using this strategy to withdraw money from a limited company, you won’t incur any personal tax liability on your salary while still qualifying for State Pension and benefits entitlements. Additionally, dividends are subject to dividend tax, which has lower rates than Income Tax, making this a tax-efficient way to receive income.
Dividends
Dividends are payments made to shareholders from the company’s profits after Corporation Tax has been deducted. Since most directors also hold shares in the company, they can withdraw money in the form of dividends, providing a tax-efficient way to receive income from the business.
There is no tax liability on dividends up to £500 per year. Beyond that, the following dividend tax rates apply:
- Personal Allowance: 0% on income up to £12,570 per year
- Basic Rate: 8.75% on income up to £50,270 per year
- Higher Rate: 33.75% on income between £50,271 and £125,140 per year
- Additional Rate: 39.35% on income over £125,140 per year
Sole traders, in contrast, would pay higher Income Tax and National Insurance on the same amount of taxable income.
Dividend income counts toward your overall income for tax purposes. If your total annual income exceeds the basic rate threshold, dividends may be subject to higher or additional dividend tax rates, so it’s important to manage your income carefully to avoid falling into higher tax brackets.
Illegal dividends
Dividends are only paid when a company has retained profits after covering all costs, expenses, and business taxes for the current financial year. The company must also consider retained profits and losses from previous years before distributing dividends.
If there are no profits left after these calculations, the company cannot pay dividends. Issuing dividends without sufficient profit is illegal and may lead to an HMRC investigation and penalties.
How to issue dividends
Limited companies can distribute dividends in two ways: as interim dividends throughout the year or as final dividends at the end of the financial year. Most small companies prefer issuing interim dividends because owners typically rely on this steady income.
To issue dividends, directors must formally declare them at a board meeting and agree on a payment date. On the declared date, the company should provide shareholders with dividend vouchers (also known as dividend ‘counterfoils’).
A dividend voucher is a document, either on paper or electronic, that includes the following details:
- Company name and registration number
- Date the dividend was issued
- Shareholder’s name and address
- Payment amount
- Number and class of shares on which the dividend payment is being issued
- Director’s signature
Even if a company has only one director, they must still record minutes of the board meeting. The director should keep copies of these minutes at the company’s registered office or the Single Alternative Inspection Location (SAIL) address.
Director’s loans and director’s loan accounts
A director’s loan is another tax-efficient method for withdrawing money from a limited company. This type of loan allows a director to borrow money from the company or for the company to borrow money from the director. All such transactions must be recorded in a director’s loan account, which can be managed as a bank account or a bookkeeping entry.
The loan account will maintain a running balance of all funds either paid into the company by a director or withdrawn by a director. These balances will reflect whether the account is ‘in credit,’ ‘nil,’ or ‘overdrawn,’ similar to how a personal current account with an overdraft operates.
Example scenarios:
- A director borrows money from a company that exceeds the amount they have given to the company. The loan account will be ‘overdrawn’ until the loan is repaid in full or written off by the company
- A company borrows money from a director. The loan account will be ‘in credit’ until the director reclaims the money they gave to the company
- If no money is owed by a director to the company or by the company to a director, the loan account will have a balance of ‘nil’
It’s important to note that there may be tax implications for both the director and the company depending on the overdrawn balance and the duration for which the loan account remains overdrawn. However, if the company owes money to the director, the director can withdraw this amount from the loan account at any time without incurring any tax liabilities.
Tax on director’s loans
Directors must account for all transactions in a director’s loan account on the company’s balance sheet. They may also need to report these transactions in the Company Tax Return and their Self Assessment tax return. The tax liability for an overdrawn loan depends on the amount owed and the duration of the overdraft.
If the director repays an overdrawn loan of £10,000 or less within 9 months and 1 day from the company’s accounting reference date (ARD), there are usually no tax consequences. However, if the director doesn’t repay within this timeframe, the company must pay 33.75% of the outstanding amount as Corporation Tax.
For loans exceeding £10,000, directors must declare the amount on their Self Assessment tax return, and the official interest rate of 2.25% may apply. Both companies and directors can charge interest on any amount owed to them, depending on the agreement.
When a company loans money to a director, it is classified as a ‘benefit in kind.’ This means that Class 1 National Insurance must be deducted through payroll. If the company writes off the loan, it counts as taxable income, requiring the director to pay Income Tax on it through Self Assessment.
Conversely, when a director lends money to the company, they can charge interest on the loan amount. If the director charges interest, the company can count it as a business expense, while the director must report this interest as personal income on their Self Assessment tax return. However, if the director does not charge interest, the company must disclose the loan in its Company Tax Return.
Leaving surplus profit in a company
One of the advantages of a limited company is the ability to leave surplus income in the business and withdraw it in a future financial year. This strategy is particularly useful if withdrawing the funds now would push you into higher Income Tax and/or Dividend Tax brackets. Sole traders, unfortunately, do not have access to this kind of tax-planning strategy.
What tax do company directors pay?
Company directors pay Income Tax and National Insurance contributions based on their total annual income. Directors pay these deductions through PAYE, and if they earn additional income beyond their salary, they report and pay the extra tax via Self Assessment. The company collects Income Tax and Class 1 NIC on the director’s salary through payroll and submits these payments to HMRC, along with the company’s own employer’s National Insurance contributions.
When a director receives a portion of their income as dividends, there is no National Insurance payable on that income, which results in savings for both the director and the company. However, if the director is a higher-rate taxpayer, they may have to pay a higher rate of tax on the dividends received.
Self Assessment for company directors
Directors must register for Self Assessment and report all sources of both taxed and untaxed income on their annual Self Assessment tax return. If a director’s total tax liability exceeds the amount collected through payroll – for example, due to additional income from dividends or taxable benefits – they are responsible for paying the remaining amount via Self Assessment. This ensures that all income, including non-salary earnings, is properly taxed.
Reporting an overdrawn director’s loan through Self Assessment
There are specific tax implications for directors and limited companies when a loan account remains overdrawn or in credit for an extended period. In some cases, interest rates may apply.
Companies might need to report details of directors’ loans in their Company Tax Returns and may be liable to pay tax under Section 455 of the Corporation Tax Act 2010.
Directors may also need to report these loans on their Self Assessment tax return and pay Income Tax on any loans that have been written off or on any interest received from the company.
When to report a director’s loan on your Self Assessment tax return
Directors must report loans on their Self Assessment tax returns in the following situations:
- The director owes the company more than £10,000 at any time during the year
- The director pays the company interest on a loan below the official rate of interest
- The director is not required to repay the loan because it is ‘written off’ or ‘released’ by the company
- The director charges the company interest on a loan, which is classed as a form of personal income
In these cases, HMRC may view the director’s loan and interest payments as forms of taxable income, making the director liable for Income Tax and National Insurance Contributions.
We strongly recommend consulting an accountant or tax advisor to assist with director’s loans and Self Assessment tax returns, especially if you are unfamiliar with these matters. An accountant can provide tailored advice on the most tax-efficient ways to withdraw money from a limited company.
Do you have any other questions?
So, when taking money out of a limited company in the UK, directors and shareholders have several options. One common method is through a salary, which is subject to PAYE tax and National Insurance. Additionally, issuing dividends to shareholders is popular since they carry lower tax rates but require sufficient company profits. Directors can also claim legitimate business expenses or take a director’s loan if handled carefully and repaid within nine months. It’s essential to understand the tax implications and keep accurate records to avoid issues with HMRC.
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