A limited company is a separate entity in the eyes of the law, just like an individual person. This means that all finances legally belong to the business in the first instance, so you cannot simply take money out of a limited company like it is your own personal bank account.
To legally take money out of a limited company, you must follow certain procedures, which are:
- Paying yourself a director’s salary
- Issuing dividend payments from available profits
- As a directors’ loan
- Claiming expenses for business-related items
All business finances must be transferred through the correct channels and accurately recorded in your company’s accounting records.
Take money out of a limited company as a director’s salary
As a company director, you can pay yourself a regular salary through HMRC’s Pay As You Earn (PAYE) system. To do so, your company must be registered with HMRC as an employer. This is a simple procedure that you can complete online.
Depending on the salary you pay yourself, you may have Income Tax and/or National Insurance Contributions (NIC) deducted every pay period. The company will pay this to HMRC every month or quarter. Salary payments are a tax-deductible expense, so your company will not have any Corporation Tax liability on this money. However, the business will have to pay 13.8% Employer’s National Insurance Contributions on your annual salary earnings above the NIC Secondary Threshold of £8,784 (2020-21 tax year).
Many directors pay themselves a salary up to the NIC Primary Threshold of £9,504 to avoid paying Income Tax and NIC. However, they still qualify for the State Pension and benefit entitlements because they are earning above the Lower Earnings Limit of £6,204/year.
Alternatively, you can pay yourself a salary up to your annual tax-free Personal Allowance of £12,500. You would not pay Income Tax on your salary, but you would have to pay 12% Class 1 National Insurance between on your earnings between £9,504 and £12,500. The remainder of your income can be taken as dividends, of which the first £2,000 are tax free.
Take money out of a limited company as dividends payments
As a shareholder, you can choose to leave surplus income in your company to further the aims of the business. Alternatively, you can take your share of business profits as dividend payments. These dividends will be issued in relation to the percentage of ownership represented by your company shares. If you are the sole shareholder in a company, you are entitled to receive all remaining income after the deduction of costs, expenses, and tax.
Companies pay 19% Corporation Tax on all taxable income. Dividends are issued from the profits that are remaining after tax has been deducted. The first £2,000 of annual dividend income is tax free. Furthermore, you will not have to pay any Income tax or NIC on your dividends. Above the £2,000, you will instead pay Dividend Tax at a rate dependent upon your Income Tax band (i.e. Basic rate, Higher rate or Additional rate).
To pay dividends to shareholders, you will need to ‘declare’ them at a board meeting or the director. Minutes of any such meetings must also be taken. This procedure must be followed even if you are the only director and shareholder in the company. In such instances, you simply need to record the fact that you’ve issued yourself a dividend on a certain date. You must also keep a dividend voucher to show details of the payment.
Take money out of a limited company as a director’s loan
A director’s loan is another way that you can take money out of a limited company. This method can be used to:
- lend money to your company
- borrow money from your company that exceeds the amount you have put into the business
- reclaim money that you have previously put into the company
A record of any such loans must be kept in a Director’s Loan Account and shown as part of your company’s balance sheet.
If you remove more money than you have paid into the business, your Director’s Loan Account will be overdrawn. There may be tax implications in this instance. If your company owes you money, your loan account will be in credit. In such instances, you can reclaim this money at any time without facing any personal tax liabilities.
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 alongside its Corporation Tax liability
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
If your loan is written off (not repaid):
- Your company must deduct Class 1 NI through payroll
- You must pay Class 2 and Class 4 Income Tax on the loan through Self Assessment
Keeping a record of directors’ loans
You must keep a record of:
- Money a director gives to the company, other than payments for any shares they take
- Money a director borrows from the company
This record is typically kept in the form of a Director’s Loan Account. It may be subject to certain tax liabilities, depending on the amount of money in question.
Director’s loan account in credit or with zero balance
When a director removes less money from a company that they have put in, the director is not borrowing money. They are simply reclaiming the money they put into the business.
Depending on how much money is taken, the director’s loan account will either remain in credit or show a balance of nil. When the account is in credit, the available money can be withdrawn at any time without any tax implications.
An overdrawn director’s loan account
If a director removes more money than they put into the business (other than as a salary, dividends, or expenses), the withdrawal is treated as a benefit and classed as a director’s loan. The Director’s Loan Account is subsequently overdrawn.
Where a Director’s Loan Account remains overdrawn nine months after the end of the accounting period, 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.
Take money out of a limited company as expenses
There may be times when you have to pay for business expenses out of your own pocket. However, as long as the expenses are for business purposes only, you can reclaim the money from your company. To do so, you will need to keep receipts and complete claim forms.
The types of tax-deductible expenses you can claim include:
- Travel and accommodation
- Mileage and parking charges
- Mobile phones
- Computer and office equipment
- Training fees
- Postage costs
Your company can reimburse expenses when you receive your monthly salary or at any other interval that is convenient. The company must retain all receipts for at least 6 years and record the expense refunds in its accounts.
At the end of every tax year, you should complete form P11D to show how much you claimed in expenses. You must then include the expenses in your Self Assessment tax return, otherwise you will be taxed on this money.
The company should include any expenses it has reimbursed to directors (any other employees) in the employment section of its annual Company Tax Return. HMRC will treat this money as an allowable expense, so the company will not be liable to extra tax.
Some expenses are eligible for dispensation and do not have to be reported on the Company Tax Return or included 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.