A limited company is a type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors). In the UK there are three main types of limited company; private company limited by shares, public limited company and private company limited by guarantee. If you have set up a limited company, you might think you can take money from the company's profits at any time, but it is not as simple as that. Limited companies become a legal entity in their own right when they are incorporated at Companies House, the UK government's registrar of companies. That means the company's assets and profits belong to the company, not the business owner, so you cannot simply withdraw funds in the way that a sole trader can. So who can withdraw money from a limited company, and how? If you want to know more, see below for our handy guide.
Who can withdraw money from a limited company?
When you register a limited company, you will need to appoint a director who will run the company on behalf of the shareholders. The director is usually a shareholder as well if the business is small, but this is not always the case. Technically, the director can withdraw money from a limited company whenever they want, but this is not considered best practice. A limited company needs to complete its own separate tax return and pay corporation tax, so the money does not belong to the director to take as and when they want.
How to take money out of a limited company
Money can be withdrawn from a limited company in one of three ways, director's salary, expenses and benefits, dividends or a director's loan. We will explore each option in more detail, below.
Director's salary, expenses and benefits
The most familiar method of taking money out of a limited company is for the directors to pay themselves a salary. Company directors are still employees of the business, and they will need to be registered with HMRC for PAYE and pay National Insurance Contributions on their earnings. Most company directors choose to take a very small salary, up to the National Insurance Contributions threshold of £8,840. This means that they will still qualify for the state pension and benefit entitlements, without incurring a personal tax liability.
Dividends
If the director is paying themselves a very small salary, they usually take the majority of their money in the form of dividends. You can take dividends from your company as long as it has the reserves to do so (but be aware that reserves are different to profits). Dividends are paid out of the company's profits after corporation tax has been deducted. It is an incredibly tax efficient method of taking a payment as the rate of tax on dividends in the basic rate band is 8.75%. This is after the dividend allowance of £500. Dividends in the higher rate are taxed at 32.5% and 38.1% at the additional rate.
Director's loan
If you take money from a limited company and it is not in the form of a salary or dividend, this is known as a director's loan. All transactions of this type must be recorded in a directors' loan account, which keeps a running balance of any transactions between the director and the company. If the director has paid in more money than they have taken out, the company account balance is 'in credit'. If the director has withdrawn more money than they have paid in, the balance is 'overdrawn'. All transactions will need to be recorded on the company's balance sheet, as well as the company tax return and the director's self-assessment return (in some cases). The director's loan account can be overdrawn by up to £10,000. If the account is overdrawn by greater than £10,000 at any point in the tax year, it must be declared on a P11D and tax paid on the benefit. Overdrawn directors loan accounts also attract an additional tax, payable by the company, of 32.5%.
Comments