How to take money out of a limited company

A limited company is a separate legal person in the eyes of the law, just like an individual. This means that all business income legally belongs to the company rather than its directors and shareholders. Consequently, you cannot take money out of a limited company for personal use whenever you like. There are certain rules and procedures you need to follow.

As a shareholder and director, you can legally withdraw money from your company account in the following ways:

• Paying yourself a director’s salary
• Issuing dividend payments from distributable profits
• As a director’s loan
• Reimbursement of personal funds you’ve paid into the company or spent on business expenses

Using a combination of some or all of these methods is the most tax-efficient way to pay yourself through a limited company, helping to minimise your business and personal tax liabilities. We take a look at each one in turn. 

Take money out of a limited company as a director’s salary

If you’re a company director, you can pay yourself a regular salary through HMRC’s Pay As You Earn (PAYE) system. To do so, you must first register your company as an employer with HMRC. This is a simple registration procedure that you can complete online.

Form a limited company today and be more tax efficient - from only £2.99 See also: Business tax guide for 2024-25

You can then start paying yourself a director’s salary on a regular basis alongside any employees you may have. Depending on the level of salary you decide to take, you may have to pay Income Tax and National Insurance contributions (NIC) every pay period. The company will make these deductions and send them to HMRC every month or quarter.

What are the tax implications?

Salary payments are a tax-deductible business expense, so your company won’t pay Corporation Tax on this money. However, it will have to pay 13.8% employer’s National Insurance contributions on any salary earnings above the NIC Secondary Threshold of £9,100 per year (2024/25 tax year).

Many directors pay themselves an annual salary up to the NIC Primary Threshold (currently £12,570 per year). This is also the limit of your annual tax-free Personal Allowance. 

By taking this amount, you can avoid Income Tax and employee Class 1 NIC on your director’s salary. However, you’ll still qualify for the State Pension and benefit entitlements because it’s above the Lower Earnings Limit of £6,396 per year.

If you take a salary above £12,570, you’ll pay the following rates of Income Tax:

• 20% (basic rate) – earnings from £12,571 to £50,270
• 40% (higher rate) – from £50,271 to £125,140
• 45% (additional rate) – above £125,140

However, if you live in Scotland, you’ll pay Scottish Income Tax at the following rates instead:

• 19% (starter rate) – earnings from £12,571 to £14,876
• 20% (basic rate) – from £14,877 to £26,561
• 21% (intermediate rate) – from £26,562 to £43,662
• 42% (higher rate) – from £43,663 to £75,000
• 45% (advanced rate) – from £75,001 to £125,140
• 48% (top rate) – above £125,140

You will also need to pay employee Class 1 National Insurance contributions at 8% on salary earnings between £12,571 and £50,270, then 2% on anything above that amount. 

Take money out of a limited company as dividend payments

As a shareholder, you can also take dividends on top of your salary. Paying yourself a combination of a director’s salary and dividends is more tax-efficient than taking all of your personal income from the company as a salary.

This is because dividends are subject to lower personal tax rates than wages. Payments are made from company profits after tax, so the company has already paid Corporation Tax on the money you take as dividends. 

See also: How dividends work in a private limited company See also: Do I need to register for Self Assessment after I set up a company? See also: What tax do I pay as a Scottish company director and shareholder?

Companies issue dividend payments to shareholders based on the percentage of ownership and profit entitlement represented by their shares. For example, if you are the sole shareholder in a company, your shares represent 100% ownership, and you’re entitled to 100% of any profit.

Alternatively, you can leave some or all of this surplus income (profit) in your company, either to further the aims of the business or withdraw as dividends in a future tax year.

What are the tax implications?

Companies pay between 19% and 25% Corporation Tax on all taxable income from trading, investments, and the sale of business assets. Anything remaining is profit, from which the company can issue shareholder dividends.

Dividends are not liable to Income tax or National Insurance contributions. There is also an annual dividend allowance of £500, meaning that you won’t pay any personal tax on the first £500 of dividend income you receive from the company.

On dividends above the £500 allowance, you will pay dividend tax at rates according to your Income Tax band. The current rates of tax on dividends are:

• 8.75% (basic rate) 
• 33.75% (higher rate)
• 39.35% (additional rate)

To work out your Income Tax band and calculate your tax liability on dividends, you must add your total dividend income to your salary and any other taxable income you receive (e.g. from another job or a pension). You may pay tax on dividends at more than one rate.

Example

You receive £25,000 in dividends and take a director’s salary of £12,570 in the 2024-25 tax year. This gives you a total annual income of £37,570.

You have a tax-free Personal Allowance of £12,570. Deduct this from your total income, which leaves a taxable income of £25,000.

This is within the basic rate Income Tax band, so you will pay:

• No Income Tax on your salary 
• No employee Class 1 National Insurance contributions 
• Zero tax on the first £500 of dividends (because of the tax-free dividend allowance)
• 8.75% tax on the remaining £24,500 of dividend income

Your personal tax liability on these earnings is £2,143.75 (8.75% dividend tax on £24,500 of dividend income).

You need to report your dividend income on a Self Assessment tax return and pay any tax you owe directly to HMRC after the end of the tax year. To do so, you must first register for Self Assessment.

How to issue dividends

To issue dividend payments, the director(s) must determine how much distributable profit the company has available. Care must be taken to avoid issuing illegal dividends, which happen when a company pays more in dividends than in distributable profits.

See also: How illegal dividends affect your limited company

The director(s) must then ‘declare’ the dividend payments at a board meeting. Minutes of any such meetings must also be taken. You need to follow this procedure even if you are the only director and shareholder in the company. In such instances, you must record that you’ve issued a dividend to yourself on a certain date.

You’ll also need to create a dividend voucher for every dividend payment your company makes. The voucher must show the:

• date of issue
• company name
• names of the recipient shareholder
• amount of the dividend

The company must give the shareholder a copy of the voucher and keep a copy for your company’s records.

Typically, companies pay dividends directly into a shareholder’s personal bank account from the business bank account.

Take money out of a limited company as a director’s loan

A director’s loan is another way to take money from a limited company. You can use this method 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

Any such loans must be recorded in a director’s loan account and shown on your company’s balance sheet.

What are the tax implications?

If you withdraw more money than you have paid into the business, your director’s loan account will be overdrawn. This may have tax implications.

However, if your company owes you money, your loan account will be in credit. In such instances, you can reclaim this money anytime without facing personal tax liabilities.

If you owe your company less than £10,000:

• You won’t 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 charged at 33.75%. The company will pay this as part of its Corporation Tax bill but can reclaim the tax when the loan is repaid in full, written off, or released

You owe your company more than £10,000:

• You need to declare the loan on your Self Assessment tax return
• In some cases, you may have to pay Income Tax on the loan and any interest received 
• The company must treat the loan as a ‘benefit in kind’ and deduct employee Class 1 National Insurance on the loan
• You must show the outstanding loan amount on your Company Tax Return
• The company will have to pay Section 455 tax at 33.75% of the overdrawn amount, but this can be reclaimed when the loan is repaid in full, written off, or released

If your loan is written off (not repaid):

• Your company must deduct employee Class 1 NIC through payroll
• You must pay Income Tax on the loan (including any interest earned) through Self Assessment

Director’s loan account in credit or with zero balance

When directors withdraw less money from a company than they have invested, they are not borrowing money. They are simply reclaiming the money they have invested in the business.

Depending on how much money is taken, the director’s loan account will either remain in credit or show a nil balance. When the account is in credit, the available money can be withdrawn without 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, HMRC will charge S455 tax at the rate of 33.75%. This tax (less interest) 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, if the expenses are for business purposes only, you can reclaim the money from your company. To do so, you must 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
• Working from home costs
• General office expenses – e.g. stationery, postage
• Computer and office equipment
• Training fees
• Business insurance costs
• Professional services – e.g. accountancy and legal fees

Your company can reimburse expenses when you receive your monthly salary or at any other convenient interval. The company must retain all receipts for at least 6 years and record the expense refunds in its accounts.

Reporting expenses and benefits to HMRC

If you receive expenses and benefits (e.g. company cars and health insurance) through payroll, you should report them to HMRC through your payroll software. The company will need to pay tax throughout the year on any benefits you receive.

At the end of the tax year, you must report any employer’s Class 1A National Insurance the company owes by submitting form P11D(b) online.

If you don’t receive your expenses and benefits through payroll, the company must complete form P11D for HMRC at the end of the tax year. You must also complete form P11D(b) for any employer’s Class 1A National Insurance the company owes.

GOV.UK provides further guidance on expenses and benefits for employers.

You also have the option to claim tax relief through Self Assessment on business expenses you incur personally. However, you can’t do this if you claim the expenses from the company – it’s one or the other.

Thanks for reading

We hope you’ve found this post helpful. Limited company tax and accounting requirements can be complex, so we recommend seeking professional guidance from an accountant.

Please post a comment below if you have any questions. You can also contact our company registration team directly if you’d like to speak to someone about setting up a limited company. Alternatively, if you are ready to register a company, have a look at our Rapid Formations homepage, where you can get started by selecting a company name.