Taking Monies out of a Limited Company

Running a limited company involves navigating various financial considerations, including determining how to withdraw funds. As a director and shareholder, you have several options to access the company’s funds: salary (PAYE), dividends, and repayment of a director’s loan account. Understanding these methods will help you make informed decisions about how to take money out of your limited company. In this article, we will explore these strategies in detail, highlighting their advantages and considerations.

Salary (PAYE):

Setting up a payroll system allows you to receive a salary from your limited company. By working for the company as a director, you can earn a regular income. Some benefits of using payroll include:

• Tax-Free Income: By setting up a payroll system, you can take approximately £758 per month from your business tax-free. This threshold allows you to receive a regular income without incurring personal tax or National Insurance contributions.
• Qualifying Year for State Pension: Opting for a payroll salary means that each full year where a payroll is run you will gain a qualilifying year for your state pension
• Corporation Tax Savings: Embracing payroll as a method of taking money out of your company can lead to significant savings in corporation tax. Payroll is considered a legitimate business expense, allowing you to save approximately £1,700 annually on your company’s tax liability.

Please note that these figures are approximate and may vary based on the prevailing tax regulations and individual circumstances.

Please note the above only applies if you do not receive income outside of your limited company – if you do this will eat into your tax-free personal allowance and prevent you from utilizing a tax free salary – in this case we would not recommend using PAYE to pay yourself.

Dividends:

Dividends are payments made to shareholders based on their shareholding in the company. However, certain rules must be followed when distributing dividends:

Dividends cannot exceed the available profits from the current and previous years.

Dividends should be allocated to shareholders in proportion to their shareholding.

Proper documentation, such as meeting minutes and dividend vouchers, must be prepared and distributed.

Share Classes:

Different share classes may exist in a company, serving various purposes. For instance, some shares may represent ownership while others facilitate profit sharing. By utilizing share classes, dividends can be allocated flexibly. Seek advice from your accountant to determine the most suitable share structure for your company.

Dividends and Tax:

Currently, a £1,000 dividend allowance has been in place. Dividends exceeding this allowance are subject to the following tax rates:

8.75% within the basic rate band

33.75% within the higher rate band

39.35% within the additional rate band

Director’s Loan Account:

A detailed record must be kept of all money put into the company and taken out. This is when a director has either loaned money or given/sold items to the Company for they have not been paid.

Or the opposite can be true – the director has taken money out of the company which is not salary or dividends. If the director’s loan account is overdrawn at the end of the company’s tax year, there are rules as to how this should be treated.

As a very rough guide If the director owes more than £10,000 at the Company year end and this is not repaid within 9 months (the accounts deadline) then 33.75% of the amount must be paid as tax and declared on a CT600A form with the tax return.

If this amount owed is repaid in the future, then you can reclaim the 33.75% tax paid. You need to speak to your accountant about this as the rules are quite complex.

There is a link here to further info on the Gov.UK website. https://www.gov.uk/directors-loans/you-owe-your-company-money

Disclaimer – This information is based on HMRC figures for the 23/24 tax year – for more up to date information please visit https://www.gov.uk/directors-loans/you-owe-your-company-money