The main methods of withdrawing money from a limited company are through a director’s salary, expenses/benefits, dividends, and a director’s loan. As a limited company director, it is essential to know how to take money from your business legally. It is a commonly held belief that directors can deduct money from their business as they see fit, but this is not the case. This is because the law views a limited company as a distinct legal entity that is separate from its shareholders and directors. In other words, you cannot treat the money held by your business simply as your own personal bank account. The money and assets within your business belong to the business. In this article, we will explain the primary ways that you can withdraw funds from your limited company legitimately.
Method 1: Pay yourself a director’s salary
As a company director, you are classed as an employee and, hence, can be paid a salary through the HMRC’s PAYE scheme. You will first need to ensure that you are registered with HMRC for the purposes of both PAYE and National Insurance Contributions (NICs). This can be done online quickly and easily through the HMRC website.
To pay yourself in the most tax-efficient way, by taking the smallest salary possible while keeping within the primary NIC threshold, you will avoid any personal tax liability. In addition, because salaries are tax-deductible, no corporation tax will be due on the amount you pay yourself.
Paying personal income tax
If your salary exceeds the personal tax allowance of £12,570 (note this has been frozen until 2028), it is important to note that you will need to pay income tax. The tax allowance is the amount of money you can earn before you pay personal income tax. The current personal income tax rates are as follows (as of March 2023):
- 20% (Basic rate income tax): £12,571 – £50,270
- 40% (Higher rate income tax): £50,271 – £150,000
- 45% (Additional rate income tax): Above £150,000
By paying PAYE and NICs, you will also contribute to pay towards your state pension and benefits entitlement.
How to Pay Yourself a Salary (or Dividends) as a Director of Your Own Limited Company
Method 2: Paying yourself dividend payments
In addition to taking a salary from your limited company, you can pay yourself in the form of dividends. Taking dividends and a small salary is currently the most tax-efficient way of drawing money from a limited company. A dividend is simply a distribution of profits made by a company to its shareholders. As such, any amount not paid in the form of dividends can be re-invested into the business. It is also important to note that it is illegal to pay yourself a dividend if your limited company does not have enough profit after tax to cover the amount taken.
Dividends are paid from your share of the profits proportional to your shareholding. So if you have a 50% shareholding, you are entitled to withdraw dividends equivalent to half of the company profits. If there are multiple shareholders, you will need to calculate how much you can take in dividends for yourself. If, however, you are a 100% shareholder, you can take all of the profits after the costs, expenses, and tax have been paid.
Dividends will be paid by your limited company from the profits left after the deduction of tax. Dividends are not classed as tax-deductible business expenses and, therefore, cannot be deducted from your Corporation Tax (the current rate of Corporation Tax is 19%)
Note: From 1 April 2023, the main rate of Corporation Tax will be increased to 25% on profits over £250,000. Companies with profits between £50,000 and £250,000 will benefit from marginal relief. Marginal relief means that the rate paid will increase gradually from 19% to 25%, depending on your profits.
Dividend tax
Any dividends you pay yourself will not attract income tax or NICs. You will, however, need to pay dividend tax on any dividends over £2,000 (the dividend tax allowance). The amount of dividend tax you pay will depend on your income tax bracket, either at the basic rate, higher rate, or additional rate. It is important to note, however, that the tax you pay on dividends will be lower than you would pay if you paid yourself a salary.
The dividend tax rates for 2023/24 are as follows:
- Dividend allowance (6 April 2022 to 5 April 2023): £2,000
- Basic rate (£0 – £37,700): 8.75%
- Higher (£37,701 – £150,000): 33.75%
- Additional rate (£150,000 +): 39.35%
What Taxes Do I Pay As a Limited Company?
Dividend vouchers
To pay yourself a dividend as a shareholder, this must be declared at a board meeting. It is important to keep minutes of any board meetings, noting the declaration of dividends.Even in you are the sole director, you will still need to keep records of the dividends you have received. In addition, you will also need to issue and retain dividend vouchers showing details of the dividend payments. The dividend voucher will need to show the following:
- When the dividend was paid
- Your limited company name
- The names of all shareholders being paid a dividend, and
- The amount of the dividend.
Method 3: Taking money as a director’s loan
A third way to withdraw money out of your limited company is by taking a directors loan. Directors loans provide a way of both lending money to your limited company and borrowing money (or reclaiming) money from your limited company. When it comes to borrowing money from your limited company, the amount you can take as a loan must exceed the amount you have put into the business. Reclaiming allows any amount to be paid back that you have previously loaned to the business.
Bear in mind that your director’s loan account will be “overdrawn” if you take more money than you have paid into your business. Likewise, it will be “in credit” if your company owes you money.
Tax on director’s loans
If you take a director’s loan of less than £10,000, you will not need to pay any personal tax on the amount. Your company may, however, need to pay additional tax. How this is worked out depends on when the loan is repaid.
If a director’s loan is not repaid within 9 months of the company’s accounting reference date (ARD), it will need to pay section 455 tax of 33.75%. This rate applies to the amount that the director’s loan account is overdrawn. The amount of the outstanding loan will also need to be shown on the company’s next tax return.
If you take a director’s loan of more than £10,000, the company will need to treat the loan as a “benefit in kind” and deduct Class 1 National Insurance. It will also need to pay Section 455 Tax at a rate of 33.75% on the overdrawn director’s loan account amount. In addition, you will need to include the director’s loan on your Self Assessment tax form, and you may need to pay tax on the amount borrowed.
It is essential that you keep proper records detailing any dividend loans made by your limited company. This includes any money you loan to the business and any money you borrow.
Method 4: Taking money in the form of business expenses
The final method of taking money from your business is by reclaiming expenses. This approach can only be used if you have covered business expenses from your own funds. It is important to note that if you intend to claim expenses, these must be for business purposes only. You can take money from your limited company if you have paid for any of the following business expenses from your own pocket:
- Accommodation
- Computer equipment
- Entertainment and meals
- Mobile phones
- Office equipment
- Parking charges
- Postage
- Vehicle mileage
Your expenses can be paid through your normal salary. Remember, if you plan to take money from your business through expenses:
- The company will need to keep all expense receipts for a minimum of 6 years and keep records of expense refunds made to you.
- Unless eligible for dispensation, your limited company will need to declare any expenses reimbursed in its annual Company Tax Return. As long as valid expenses are included, the company will not need to pay additional tax on the claimed expenses.
- You will also need to keep accurate records of your expenses, including VAT receipts and claim forms, and
- You will need to complete HMRC form P11D to declare how much you have claimed in expenses and include this on your Self Assessment tax return. By declaring any expenses received properly, you will not need to pay tax on the amount received
In summary
As a limited company director, you can take money from your business in a tax-efficient way using four methods; salary, dividends, loans, and expenses. An experienced accountant will be able to advise how to balance the use of these four methods in the most efficient way possible. They will also be able to advise on keeping money in your business to be deducted at a later date to reduce your dividend tax liabilities.
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