If you own a limited company, you (and any co-workers) generate income for the business. So, how can you take money out of the company legally, and tax-efficiently?
Before we explore the different methods of drawing down money from a company, it is essential to remember that a company is a distinct legal entity from its shareholders.
Therefore, any funds in the company’s bank accounts belong to the company, not you.
Here are the different ways to take money out of a limited company.
- Directors’ Loans
- Reimbursement of Expenses
If you’re a sole director of your company, work with your partner/spouse, and/or have any employees, the most popular way of distributing company income to all workers is via an annual salary.
- For the company, the value of any salaries reduces the amount of profits that are subject to Corporation Tax. The company may be liable to pay Employers’ NICs too – but only if a salary is higher than the Secondary Threshold of £9,100 (2022/23).
- Many limited company directors opt to draw down relatively small salaries – beneath the prevailing starting thresholds for both income tax (Personal Allowance is £12,570 for 2022/23) and Employees’ NICs (Primary Threshold is for 2022/23: it rises from £9,880 to £12,570 from July 6th, 2022).
- So, assuming it suits both the business and its employees, drawing down modest salaries is a tax-efficient method of taking money out of the company.
- For most small companies, a tax-efficient salary is £11,908 (2022/23), if your company cannot claim the Employment Allowance (EA).
- If your company is eligible for the EA (sole director companies are not), the optimum salary level is £12,570 (2022/23). Find out more about the EA here.
- Make sure you discuss any salary setting with your accountant, as personal factors may affect your calculations.
Although not as tax-efficient a method of taking money out of a company as they once were, most director/employees extract most of the funds from their companies as dividends.
- You can declare dividends up to the value of any retained profit in the company – with each shareholder receiving funds in proportion to their shareholdings.
- If you distribute funds above the level of profit available, they are deemed to be illegal (ultra vires) and could attract the wrath of HMRC, so make sure you check with your accountant if you have any doubts over the maximum distributable amount.
- The main advantage of doing so is that National Insurance is not payable on dividends – although it would be on higher levels of salaried income.
- After a modest £2,000 ‘allowance’, dividends are taxed according to the basic/higher and additional tax rate bands, with any tax liabilities to be settled via the Self Assessment process.
- There is a correct and proper process to declaring and distributing dividends – much of it significantly simplified courtesy of excellent online accounting software, such as Freeagent.
- You can read more about dividends; what they are, and how they are taxed here.
- Try our Salary & Dividend tax calculator.
There may be times when a director lends money to his/her limited company (during the start-up phase, or when cashflow isn’t good, for example). The company can also lend money to directors, subject to strict rules.
- If you take a directors’ loan out of your company, you will not have to pay any interest on sums of £10,000 or less, as long as you repay the loan in full within 9 months and 1 day of your company’s annual reference date.
- If you fail to repay a loan within this time period, the company will be liable to an additional S455 Corporation Tax charge of 32.5%. Fortunately, HMRC will refund this additional charge when the directors’ loan is repaid.
- Loans to directors over £10,000 may also attract a personal benefit in kind charge, depending on the interest rate charged by the company; no charge applies for interest rates of 2.5% or above (according to the HMRC’s official rates on beneficial loan arrangements when the loan was first taken out).
- You may be tempted to repay a loan just before the deadline, and take out a fresh loan just afterwards. This is known as bed and breakfasting (a form of tax avoidance) by HMRC. You should wait at least 30 days before taking out a new loan to avoid a tax penalty, and – even then – you shouldn’t make a habit of regularly taking our directors’ loans.
- You should also be aware that you need to report any loans of £10,000 or more on your Self Assessment return.
Business Expenses reimbursed to directors
Any services or products purchased on behalf of the company are tax-deductible providing that they were incurred “wholly and exclusively” for the sole purpose of the business.
- Limited company expenses can be paid for directly from the company’s bank account, or by a director or other staff member. In the latter case, the company can reimburse the director for the personal funds used to make the purchase.
- You won’t gain a tax advantage by reimbursing expenses; rather, you will ensure that you don’t make company purchases out of post-tax personal income, and these expenses are rightly deducted from your company’s Corporation Tax liability.
- Read our comprehensive guide to limited company expenses to find out more.
Taking money out of your limited company – in summary
- Directors typically pay themselves a tax-efficient salary – below the prevailing income tax and NIC thresholds.
- For 2022/3, the most tax-efficient salary is £9,100, or £12,570 if your company can claim the Employment Allowance.
- Salaries reduce the amount of Corporation Tax your company has to pay on profits.
- The bulk of most directors’ income comes in the form of dividends, which do not attract a NIC liability.
- Make sure you only distribute dividends out of retained profits, otherwise they may be ‘illegal’.
- If you take out a directors’ loan, make sure you repay it within 9 months and 1 day of the company’s year end, to avoid a tax charge.
- Ideally, keep directors’ loans below £10,000, otherwise they will be classed as a benefit in kind, and declarable on your self-assessment tax return.
Please talk to your accountant before you make any decisions based on the information contained within this guide.