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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.
You can only legally take money out of your company for personal use in the following ways:
- paying yourself a director’s salary
- issuing dividend payments from distributable profits
- as a directors’ loan
- claiming expenses for business-related costs you incurred personally
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 National Insurance contributions (NIC) every pay period. The company will pay this to HMRC through PAYE 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 £9,100 (2024/25 tax year).
Many directors pay themselves a salary up to the NIC primary threshold (£12,570/year) 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 £6,396/year.
You can take the remainder of your income as dividends, with the first £500 being tax-free on account of the annual dividend allowance.
Take money out of a limited company as dividend 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 some or all of your share of business profits as dividend payments.
These dividends will be issued relative 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 profit after the deduction of costs, expenses, and tax.
Companies pay Corporation Tax on all taxable income. Dividends are issued from the profit that remains after the deduction of tax. The first £500 of annual dividend income is tax-free.
Furthermore, you will not have to pay any Income tax or NIC on your dividends. Above the £500 dividend allowance, you will pay dividend tax at rates according to your Income Tax band (i.e. basic rate, higher rate, or additional rate).
The current rates of dividend tax are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). You must report your dividend income through Self Assessment and pay any tax you owe directly to HMRC after the end of the tax year.
To issue dividend payments, you will need to ‘declare’ them at a board meeting of the director(s). Minutes of any such meetings must also be taken. You must follow this procedure 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 the 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.
However, 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 charged at 33.75% – your company will pay this 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 33.75% of the overdrawn amount
If your loan is written off (not repaid):
- Your company must deduct Class 1 NIC through payroll
- You must pay 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 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, 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
- Entertainment
- Meals
- 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 pay 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.
I’m confused about the following 2 statements in thsi article:
“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 £9,100 (2023/24 tax year).”
“Many directors pay themselves a salary up to the NIC primary threshold (£12,570/year) 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 £6,396/year.”
In order to avoid paying tax, does it mean I have to be below £9100?
Otherwise staying between 9100 and 12570, I still have to pay the secondary NIC?
If I’d (my company) have to pay the sec. NIC, which benefit would I have from the NIC as a non UK res.?
Where can I see that?
Thank you for your kind enquiry, Michael.
Yes, if you paid between £9,1000 and £12,570, you would be liable for secondary NIC.
With regards to the benefit of paying NIC to the UK government, if you did not live in the UK there would be no benefit you would see from doing so – your money would simply be spent by the government on things to benefit UK residents.
We trust this information is of use to you.
Kind regards,
The Rapid Formations Team
Hello,
I have one question regarding paying myself a salary as an only Ltd company director. I recently created my business and now I’m going to start working freelance. I’m wondering about the time I might not have any jobs. If I’m registered for PAYE can I skip the month when I don’t have any income and not pay myself a salary? Do I still have to send a payroll but maybe with 0? Thank you for the help! https://irs-offices.com/
Thanks for getting in touch.
We are not aware of any reason payments made through PAYE need be the same each month and that, some months, total payments may be zero. I’m afraid we can’t advise as regards payslips and would suggest you speak to an accountant in this regard.
We hope that helps.
Regards,
The Rapid Formations Team
How does the above apply when the Director is not a UK resident? Would the tax be due in the UK or in the country of the directors tax residency?
Thank you for your kind enquiry, Gerti.
Tax relating to the taking out of money of a UK limited company will be applicable in the UK. Whilst it is unlikely that any money would be owed in the country of the director’s tax residency, tax requirements are different in each country, so you should consult the relevant tax authorities or seek professional accountancy advice in the director’s country of residence before proceeding.
I trust this information is of use to you.
Regards,
Rachel
Your Dividend Tax Calculator doesn’t seem to work on mobile (Google pixel 2 using Chrome)
Thank you for letting us know, Edwyn. Our IT Team will take a look into this. Please accept my apologies for any inconvenience caused.
Rachel at Rapid Formations
Hello. I have started my Ltd in February. I’m an associate dentist and I’ve done this with the sole purpose of saving on my income tax. So far I’ve been paying to myself (sole director) £670 per month. I’ve also withdrawn each month the 80% of my gross income, once deducted the expenses (mainly just the professional indemnity) and the director’s salary. I’ve taken money as director’s loan (I wrote ‘DL’ in the description of the bank transfer) and not as dividends. I am not keeping a separate director’s loan account. Am I doing this right? Also, since dividends are being taxed more since 2015/2016, what are the real advantages of having an LTD as opposed as being self employed? As an associate dentist I can’t really claim travel and lunch expenses, since I work every day in the same practice. Thanks.
Dear Giorgio,
Thank you for your message.
We are not accountants so cannot advise on matters such as this and would advise that you seek specific advice from an appropriate professional.
Best regards,
Rapid Formations Team
Hello, can you back date salary payments once the company starts making money? For example, I started my company in September 2022 but I didn’t make any money until June 2023, so can I claim salary payments for those months where I didn’t earn anything? Many thanks
Thank you for your enquiry, Rebecca.
In general terms, you cannot back date salary payments. However, you can pay yourself or someone else a salary payment for a given month which includes backdated pay for previous months. However, you cannot alter historic accounting records with regards to when the salary payments were made.
We trust this information is of use to you.
Kind regards,
The Rapid Formations Team
Hi I am just wanted to clarify that if you received dividend profits(limited company) for the year of 10 thousand pounds..
Am I correct in saying you’d pay tax on 5k? Or does it depend on the amount you’ve earned for that year.
Dear Fareid,
We cannot advise on taxation matters such as this. If you are referring to the dividends you have taken as the shareholder of a company then the full £10,000 would be taxable however it is taxed at a different rate to other income and also you will likely have a personal allowance element to offset some of the income so I would suggest you gather together all of your income and use an online personal tax calculator to give you an estimate of taxation costs. I would then suggest you seek the help of an accountant to complete any taxation work you require to meet HMRC regulations.
Best regards,
Rapid Formations Team
Hi, I am going through a divorce. Husband and I are company directors. There is a considerable amount of savings in the companies bank. I would like to pay off my credit card, can I withdraw £10,000 from the bank, I am a signatory.
Kind regards,
Patricia
Dear Alicia,
We cannot advise on what you can or cannot withdraw from the company, this would be governed by the Articles of Association or other binding documents which the company has in place in terms of the handling of company funds.
Best regards,
Rapid Formations Team
I am a shareholder of a business am I entitled to pay myself what wage I decide without discussing it with the director whom owns more shares than myself
Dear Vicki,
Thank you for your message. We cannot comment on the internal affairs of a company however as you are not the majority shareholder it would be unlikely that the director/shareholder would not have an input into the salary process.
Best regards,
I am the only shareholder of my company (left to me after the death of my husband) and have now ceased trading. That company has never paid wages or dividends as PAYE was with a sister company. This particular company does however have assets and I wonder if I can claim the sum left but not sure how to do this.
It was my intention to appoint a Liqidator to go into voluntary liquidation but is this necessary?
Can I take the assets out as a dividend, and if so, do I need to make a tax return or inform HMR&C and what would the tax be bearing in mind that I made myself redundant from the sister company in August 2014.
Are you able to advise please?
Dear Kathrine
Thank you for your message.
We cannot advise on your situation as we are not accountants and would advise you seek advise from an acocuntant on your situation.
Kind regards
I am wondering, from which point director-shareholders can draw a salary. In our case the establishment of the company took some two weeks from the first “board meeting” (foreign shareholders, traveling expenses as founding costs…), until the company’s formal registration was confirmed on the 29th of September and the registration documents issued.
My question is: Can the directors draw a salary for September or is this still considered “sweat equity” and the first salary is at the end of October payable?
Hello Hans
Thank you for your message.
We are not advisors on accounting matters, so I would advise that you speak to an accountant for the information you require.
Kind regards
I’m involved in setting up a senior co-housing group. How can we fund a company limited by guarantee, become directors and then purchase land? The company will then lease some of it to us so we can build a house on it. Al the property will be owned by the company and leasing rights may be transferred.
Thank you,
Sky McCain
Dear Sky
Thank you for your question. Unfortunately, we are not financial advisors and I would suggest speaking directly to an accountant to give you advice on the funding of your limited by guarantee company.
Kind regards
Rachel