You might think that once you’ve set up your limited company, you’re free to dip into and out of the company’s profits as you see fit – it’s your company, after all!
In reality, directors who employ this ‘what’s yours is mine’ attitude to their company profits could find themselves in a lot of trouble. Taking money out of a business account for personal use has to be done according to the letter of the law.
Limited companies become a legal entity in their own right when they are incorporated at Companies House. That means the company’s assets and profits belong to the company, not the business owner. Therefore, you cannot simply take money out of the business like a sole trader, whose personal and business assets are one and the same.
There are several legal ways to take money out of a limited company as a director or shareholder. Here are the most common methods:
How Can You Withdraw Money From a Limited Company?
Salary and Bonuses
As a director of a limited company, you can pay yourself a salary and bonuses through the company’s PAYE (Pay As You Earn) payroll system. This income will be subject to income tax and National Insurance contributions (NICs), like any other employment income.
Under the Companies Act 2006, the salary and bonuses must be reasonable and commensurate with the work performed, ensuring they are justified by the company’s financial performance. Both the director and the company contribute to NICs, with directors’ contributions calculated on an annual basis, which differs from other employees who are assessed per pay period.
Dividends
As a shareholder of a limited company, you can receive dividends from the company’s profits once corporation tax has been paid. Dividends provide a tax-efficient method of extracting money from your company, as they are not subject to National Insurance contributions.
However, income tax on dividends applies depending on your total income level, with specific dividend allowances and tax rates determined by HM Revenue and Customs (HMRC). It’s essential that the company has enough retained profits and cash flow to legally declare and distribute dividends, ensuring compliance with the Companies Act 2006. This requires accurate financial records and adherence to formal dividend procedures, including board resolutions and dividend vouchers.
Director’s Loan Account
You can borrow money from the company through a director’s loan account.
The loan must be properly documented, and you will need to pay interest on the outstanding balance and repay the loan according to the agreed terms. It’s crucial to follow the specific rules and reporting requirements for director’s loan accounts to avoid potential tax consequences.
Reimbursement of Expenses
You can claim reimbursement from the company for legitimate business expenses incurred on behalf of the company, such as travel, accommodation, or office supplies.
These expenses should be supported by receipts and recorded in the company’s accounts. The company should have a clear expenses policy in place to ensure compliance with tax regulations.
Pension Contributions
The company can make pension contributions on your behalf as part of your remuneration package. These contributions are tax-efficient for both you and the company, offering a significant way to extract money from the company while planning for retirement.
Contributions made by the company do not attract National Insurance contributions and are deductible against the company’s corporation tax, subject to adherence to the annual allowances and lifetime limits set by HM Revenue and Customs (HMRC).
Benefits in Kind
The company can provide certain benefits in kind, such as a company car, private medical insurance, or other non-cash benefits.
These benefits are subject to specific tax rules and may be treated as taxable income. It’s important to understand the tax implications and reporting requirements for any benefits in kind provided by the company.
Regardless of the method chosen, it’s crucial to maintain accurate records, comply with relevant tax laws and regulations, and seek professional advice from an accountant or tax advisor to ensure you are optimising your tax position and adhering to all legal requirements.CopyRetry
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Is There a Way to Take Money out of a Limited Company Without Paying Taxes?
As this article explains, there is no way to avoid paying taxes; however, depending on your situation, there will be more efficient or less tax-efficient methods. Your company accountant’s expertise will be invaluable here.
Who Can Take Money Out of a Limited Company?
In a limited company, there are specific ways funds can be withdrawn for legitimate purposes. Here’s who can access company money and how:
Directors: Directors, appointed to run the company, can receive a regular salary like any employee.
Shareholders: Shareholders, the company’s owners, can be paid dividends from the company’s profits after taxes are paid.
Employees: Employees receive salaries and approved expense reimbursements for business-related costs they incur.
Authorised Signatories: The board of directors can designate specific individuals (authorised signatories) to access company funds for approved purposes.
FAQs on Taking Money Out of a Limited Company
What are the most tax-efficient ways to take money out of a limited company?
The most tax-efficient methods typically include paying a small salary up to the personal allowance limit combined with dividends to take advantage of lower dividend tax rates. Pension contributions are also highly tax-efficient as they can reduce your overall tax liability and are not subject to National Insurance.
What are the consequences of incorrectly extracting money from a limited company?
Incorrectly extracting money can lead to significant tax liabilities and penalties from HMRC. This might include additional taxes on undeclared income, penalties for incorrect tax filings, and interest on late payments. In severe cases, it could even result in legal action for non-compliance with corporate and tax laws.
