Tax saving strategies to take cash out of your Limited Company
A limited company is a separate entity in the eyes of the law, just like an individual person. This means that you cannot simply take money out of a limited company account like it was your own personal bank account. All finances legally belong to your company in the first instance, so you must follow certain procedures to take money out of your business. There are four ways this can be done (other ways will require seeking professional advice):
- Paying yourself a director’s salary.
- Issuing dividend payments from available profits.
- Claiming expenses for business-related items you buy with your own money.
- As a directors’ loan.
All finances must be transferred through the correct channels and accurately recorded in your company’s accounting records.
Paying yourself a director’s salary
As a director, you can pay yourself a regular salary through PAYE. To do so, your company must be registered with HMRC as an employer. You will also have to register yourself for Self-Assessment to report this income.
Depending on the salary you pay yourself, you may have Income Tax and National Insurance Contributions (NIC) deducted every pay period. The company will pay this to HMRC every month or quarter. Salary payments are a tax-deductible expense, so your company will not have any corporation tax liabilities on this money. However, it will have to pay 13.8% Employer’s National Insurance Contributions on your annual salary earnings above the Secondary Threshold (£8,424).
Many company directors pay themselves a salary up to the NIC Primary Threshold of £8,424 (2018-19) to avoid paying Income Tax and NIC, but they still qualify for the State Pension and benefit entitlements because they earn above the Lower Earnings Limit of £6,032/year.
Alternatively, you can pay yourself a salary up to your annual tax-free Personal Allowance of £11,850 (2018-19). You would not pay Income Tax on your salary but would have to pay 12% Class 1 National Insurance between £8,424 and £11,850. The remainder of your income can be taken as dividends, of which the first £2,000 is tax-free.
Paying yourself dividends
As a shareholder, you can choose to leave surplus income in your company to further the aims of the business. Alternatively, you can take your share of business profits as dividend payments. Dividends are issued in relation to the percentage of ownership represented by your shares. If you are the sole shareholder in a company, you are entitled to receive all remaining income after the deduction of costs, expenses and tax.
Companies pay 19% corporation tax on all taxable income. Dividends are issued from profits after tax. The first £2,000 of annual dividend income is tax-free, and you will not have to pay any Income tax or NIC on your dividends. Above the £2,000, you will pay dividend tax at a rate based on your tax band (i.e. basic rate, higher rate or additional rate).
To pay a dividend, you must hold a board meeting to ‘declare’ the dividend. Minutes must also be taken. This procedure must be followed even if you are the only director and shareholder. In such instances, you just need to record the fact you’ve issued yourself a dividend on a certain date, and keep a dividend voucher to show details of the payment.
Claiming business expenses
There may be times when you have to pay for business expenses out of your own pocket, but you can reclaim this money from your company by keeping receipts and completing claim forms, provided the expense was for business purposes only. The types of tax-deductible expenses you can claim include:
- Travel and accommodation
- Mileage and parking charges
- Mobile phones
- Computer and office equipment
- Training fees
- Postage costs
- Other costs incurred wholly and exclusively for business/trade
Your company can reimburse you for your expenses every month when you receive your 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.
Director’s loan account
A director’s loan account is one of the ways you can remove money from a limited company. The other ways you can do this are by taking a salary, paying yourself dividends and reimbursing expenses. Taking money out of a company is more complex than taking money from a sole trader business or general partnership structure. This is because companies exist legal entities that are separate from their owners and directors.
You can remove money from your company as a director’s loan. 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 company, and 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 money from your company that exceeds the amount you have put into the business, your loan account will overdrawn. There may be tax implications in this instance. If your company owes you money, your loan account will be in credit. and 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 always charged at 25% – your company will pay this with the rest of its corporation tax liabilities.
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 25% of the overdrawn amount.
If your loan is written off (not repaid):
- Your company must deduct Class 1 NI through payroll.
- You must pay Income Tax on the loan through Self-Assessment.
Director’s loan account in credit or zero balance
When a director removes money from a company that is no more than he has put in, the director is not borrowing money. It is simply a reception of money they put into the business. Depending on how much 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 than he put into the business (other than as a salary, dividend or expenses), it is treated as a benefit. It is therefore classed as a director’s loan. The loan account is subsequently overdrawn. Where a director’s loan account remains overdrawn nine months after the end of the accounting year, S455 Tax will be charged by HMRC at the rate of 25%. This tax is repayable to the business once the overdrawn loan is repaid.
Full details on director’s loans and loan accounts are available from GOV.UK: www.gov.uk/directors-loans
If you would like to discuss issues arising from this article or to find out more on the applicable tax exemptions, please contact Tobi Lab on 0330 311 2983 or send us an email (firstname.lastname@example.org). Sign up to receiving our newsletters