Top tips for withdrawing money from your limited company
A Limited Company is a separate business entity that has been incorporated at Companies House as a legal person. This means that you cannot simply just take the money out of the limited company account. And this is why its debts don’t belong to you. All finances belong to the company first.
When you first register your limited company, you put yourself down as a director of the company. The primary role of a director is to run the Limited Company on behalf of its shareholders. This means that the Director is typically an employee of the Limited Company.
The goal of the Director is to run the Company to ensure that it makes a profit for the shareholder(s), and therefore, there is a certain procedure that you must follow in order to take the money out. This can surely be done in following ways:
Paying Yourself a directors salary:
As the director of the company you can pay yourself a regular salary through PAYE. This can be a tax-efficient way of extracting money from your company, if done correctly, this can minimise deductions while still making you eligible for state benefits including the state pension. To do so, your company must be registered with HMRC as an employer.
You also have to register yourself for self-assessment to report this income. You have to pay necessary taxes and National Insurance depending upon the salary you pay yourself. The company will then pay this to HMRC every quarterly or every monthly. Salary payments are tax deductible expenses, so your company will not have any corporation tax liabilities on this money. However, it will have to pay 13.8% Employers National Insurance Contributions on your annual salary earnings above the second threshold.
You can pay yourself a salary up to your annual tax-free Personal Allowance of £11,500 (as per the year 2018-19). You would not be paying Income tax on your salary but you would have to pay 12% Class 1 National Insurance between £8,464 and £11,850. You should take advice from tax experts before doing this.
Issuing dividend payments from available profits:
As a shareholder, you can choose to leave surplus income in your company. You can take a share of your business profits as dividend payments. Dividends are issued in relation to the percentage of ownership represented by your shares. If you are the sole shareholder in a company, you are entitled to receive all remaining income after the deduction of the cost, tax and expenses.
19% corporation tax is paid by the companies on all taxable income. Dividends are issued on profits after tax. While working out your corporation tax, you cannot count dividends as business costs. The first £2,000 of annual dividend income is tax free, and you will not have to pay any Income tax or NIC on your dividends. But above £2,000 you will have to pay dividend tax on the rate depending upon the tax band the income falls into basic, higher and additional rate. Check it here: https://www.gov.uk/tax-on-dividends
While paying a dividend, you must hold a board meeting to declare the dividend. Minutes of the meeting should also be taken. This procedure is followed irrespective you are the sole shareholder and director of the company. You just need to record the fact that you’ve issued yourself the dividend on a certain date, and keep a dividend voucher to show details of the payment.
Take money out of the limited company as a director’s loan:
You can take money out of the company as a director’s loan. A director’s loan account records all transactions between a director and the company itself. A record of such amount must be kept in directors loan Account and shown as part of your company’s balance sheet.
Never remove money from your company that exceeds the amount you have put into business otherwise your loan account will be overdrawn. There will be tax implications in this. Where a director’s loan account remains overdrawn nine months after the end of the accounting year, S455 Tax will be charged by HMRC at the rate of 25%. This tax is repayable to the business once the overdrawn loan is repaid.
If you owe your company less than £10,000:
- You will not have any personal tax liabilities, but there may be tax consequences for your company.
- If your loan account remains overdrawn for longer than 9 months and 1 day from the company’s accounting reference date (ARD), your company will have to pay Section 455 Tax on the overdrawn amount.
- You must show the outstanding loan amount in your Company Tax Return.
- Section 455 Tax is always charged at 25% – your company will pay this with the rest of its corporation tax liabilities.
If you owe your company more than £10,000:
- You will have to declare the loan on your Self Assessment Tax Return.
- In some cases, you may have to pay Income Tax on any interest due on the loan.
- The company must deduct Class 1 National Insurance on the loan.
- You must show the outstanding loan amount in your Company Tax Return.
- The company will have to pay Section 455 Tax at 25% of the overdrawn amount.
There may be times when you have to pay business expenses from your own pocket. But you can claim these expenses by keeping receipts and completing claim forms, provided the expense was for business purposes only.
Following are the business expenses that can be claimed as a business expense:
- Travel and accommodation
- Mileage and parking charges
- Mobile phones
- Entertainment
- Meals
- Computer and office equipment
- Training fees
- Postage costs
Your company can reimburse you for the expenses every month when your salary is paid. The record shall be kept for at least 6 years and record the expense refunds in its accounts. Although business expenses will not make up a large portion of your overall take-home pay, this is a tax-free method which many directors find useful.
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At the end of every tax year you should complete form P11D to show how much you called in for expenses. You must include the expense your self-assessment tax return. The company should include the expenses it has reimbursed to directors (any other employees) in the employment section of the Company Tax Return be submitted to HMRC with the annual accounts and Company Tax Return. This money will be treated by HMRC as allowable expenses so the company will not be charged extra tax.
Some expenses are eligible for dispensation, which means you do not have to report them in the Company Tax Return or include them on form P11D. Applying for dispensation could save you a lot of time in the long run, but you may need an accountant to check your expenses. All finances must be transferred through a proper channel and recorded in your company’s accounting records to make task simpler for everyone.
Knowing how best to take money from your company can be complicated, and the implications of doing this wrong could have serious ramifications not only financially, but also on you personally as a director. Having a dedicated accountant can take the stress out of tax planning.
