How to take money out of a limited company
Many contractors choose to become directors of their own limited company as it may be more tax efficient than working through an umbrella company. Which could enable them to maximise their take home pay and take advantage of savings that are designed to help limited companies.
A limited company is an individual legal entity, registered with Companies House, all the money and assets belong to the company as opposed to the owner. This means that you cannot just take money from your business like you would your personal business account. There are specific procedures which need to be followed and any money going in and out of your business bank account must be accounted for.
As a director of limited company, there are four ways to withdraw money, which include regular payments and one-off transactions. These are:
- Directors salary
- Dividend payments
- Directors loans
- Reimbursement of expenses
It is important to understand how each method works and what you need to do to ensure that you are accounting for everything correctly.
Paying a Directors Salary
The first thing to do when you plan your directors salary is to ensure that your company is registered as an employer with HM Revenue and Customs because, as a director you will technically be an employee of your limited company.
This will mean that you deduct Income Tax and National Insurance Contributions from your wages as well as Employers National Insurance Contributions. These should all be paid directly to HMRC on either a monthly or quarterly basis. Don't worry your accountant will be able to help you.
Salaries are tax-deductible expenses, which come from a company’s profits before Corporation Tax is calculated. This means that the company doesn’t pay tax on the sum, but if the amount is over the personal allowance for personal taxation then the director may incur a personal tax liability.
When a director is paid through their limited company, any sums that exceed the tax free personal allowance will usually be subject to PAYE tax. Though if expenditure which occurs wholly, exclusively and necessarily in the course of doing business can be repaid to the director, which out attracting any addtional tax. These can include travel, subsistence, telephone and internet costs, professional subscriptions, training, equipment and certain other expenses which are detailed in HMRC guidance. For more information on expenses please click here.
Many directors choose to pay themselves dividends on top of their salaries. Dividends come out of the company's profits after the 20 per cent Corporation Tax liability has been deducted, but shareholders do not currently have to pay any personal tax liability on dividends which fall within the basic rate tax band.
If you pay yourself more than this amount in dividends then you will have to pay tax at the higher Dividend Tax Rate (currently 25% of the net dividend), which is lower than the normal rate of income tax (currently 40%) and still represents a saving.
Limited companies can issue dividends at the end of the financial year, and at points throughout the year, which is common when the directors or shareholders rely on the dividends for income. The company directors must declare dividends and a payment date agreed at a board meeting after which, the shareholders should be issued with a dividend certificate. This procedure should be followed fully even if the company only has one director.
A directors loan can be a tax efficient way to use company money by allowing a director to borrow money from the business or for the business to borrow money from a director. These transactions must take place through the use of a directors loan account. The loan account will maintain a running record of any money moved between the business and its director(s) and show whether the account is in credit at nil balance or overdrawn.
The tax liabilities concerning loans depend on the balance and the length of time for which the account is overdrawn. If the company owes money to a director, then that sum can be withdrawn at any time without incurring any tax liabilities. All loan activity must be accounted for in the company’s balance sheet, including, where necessary, on the Company Tax Return and the director’s Self Assessment Tax Return.
Keeping your Accounts in Order
For many people, the rules and regulations concerning the management of a limited company's finances can seem complex and impossible to navigate without specialist expertise. Using an accountant who is familiar with the ins and outs of the tax system is the best way to ensure that your business administration is kept up to date and compliant. Running a business can be hard enough without worrying about your bookkeeping and trying to keep track of the various rates of tax that might apply to your income, profits and investments, but an accountant will save you time and money and free you up to focus on your work.
How can Nixon Williams help?
With more than twenty years experience of representing independent professionals such as freelancers, contractors and those trading through limited companies, Nixon Williams’s accountants have plenty of experience in dealing with those who want to operate as tax efficiently as possible.
Having an accountant on hand to answer your questions, liaise with HMRC on your behalf and help you to make the best decisions can make it much easier to run your business and enable you to enjoy peace of mind as well as a secure financial position. For more information on how our fixed-fee packages could help you, call our new business team on 01253 362062 or email: firstname.lastname@example.org.