Serving over 2 Million visitors each year

Search
Free Accounts Software for All Small Businesses
You can now download TAS Basics for FREE. It’s the complete working program and there’s no charge, no obligation and no time limit. Get it now!

How can I draw money from a limited company?

print  e-mail 

This article was provided for Bytestart readers by HfM Tax and Business Services

Introduction

There are three main ways in which money can be drawn from a limited company - repayment of a director's loan, salary and dividends - but there are key issues to understand regarding each of these. It is important to organise the balance of these three items (when they are all available) in order to minimise your tax liability. However, the basic fact will remain - the more profit the company makes, the more tax you are likely to pay. There is no magic scheme for removing all tax liability! Let's consider each in turn.

Repayment of director's loan

If you have put your own money into the company, then this is recorded in the director's loan account which totals the money the company owes you. You can draw from this at any time without any tax liability, but you will need to make sure that the cash flow of the business can support this. While it sits in the company you are entitled to charge the company interest. The interest rate is determined by the Board of Directors and should be at a reasonable commercial rate.

The interest you receive must also be declared on your personal tax return as it will be subject to tax. However, if the director's loan account becomes a loan from the company to you, then you need to be careful as you should not owe the company more than £5,000. If you exceed this you must notify HMRC of the loan and pay 25% of the loan account balance. This tax is however refunded as soon as the loan balance is reduced.

Salary

Remember that the company is a separate legal individual to you. So it can pay you a salary and, just as would happen in any job, tax and national insurance (NI) must be deducted before you receive your pay. The company also pays 12.8% of the salary in NI contributions and is responsible for paying this and the employee's tax and NI deductions to the Revenue. So, there are significant additional costs in the company paying you a salary.

However, as everyone receives an annual tax personal allowance and there is a further amount of approximately £2,000 that is only taxed at 10%, you can take a salary of, say, £6,500 (up to which point no NI is due) and only pay tax of around £200. You should at least take the annual allowance in salary and preferably the 10% rate band also.

Dividends

These are a distribution of profits, so it goes without saying that the company must be making a profit before dividends can be paid. If there is no profit then repayment of director's loan and salary are the only routes. The directors decide on the distribution of profits in dividends and must be voted on and minutes drawn up before the year end. Remember that there should be a board resolution with the date of distribution recorded. Dividends are taxed but, at present at least, are not subject to NI, so saving both employers and employees NI payments.

Complexities

It is important that you grasp the principles but the issues are sometimes complex and we recommend that you take professional advice on these matters. Remember too that governments do change the rules so exercise caution.

Posted May 3, 2006

Latest articles in Business Tax
 
Annual Investment Allowance limit reduction from April 2012 - what should businesses do?
George Osborne's Emergency Budget gave notice that the Annual Investment Allowance (AIA) annual limit is to be significantly reduced from April 2012. What should businesses do to plan in advance? [August 12, 2010]
 
Accountant provides clarification on how dividends are taxed
A small business accountant provides some clarification on the amount of tax payable by shareholders when dividends are paid, particularly, by private companies. [July 14, 2010]
 
Tax strategies to consider in a high tax environment
The era of the Additional Rate Tax has begun. Partners and the self employed, in fact all non-PAYE earners, who clock up income over £150,000 during the 2010/11 fiscal year will be hoping that the new 50% rate will go away, but it won’t and it is no use burying our heads in the sand. [April 26, 2010]
 
Annual Investment Allowance - how does it work?
One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance, from £50,000 to £100,000. So, how does the AID work in practice? [April 16, 2010]
 
Business rate changes from October 2010
One of the key announcements from Budget 2010 was in a 'freeze' in business rates for some small companies from October 2010 - so which businesses will benefit, and by how much? [March 26, 2010]
 
Tax tips for entrepreneurs to address before 6th April 2010
Business advisors at Deloitte are urging entrepreneurial businesses to make final reviews of their tax position to ensure their financial house is in order before the start of the next tax year. [March 22, 2010]
 
Declaring dividend payments before 50% tax rate start date
The approaching commencement of the 50% tax rate and the phased withdrawal of personal allowances for those with income between £100,000 and £112,950 are leading those affected to consider tax planning to find potential ways to reduce the increasing tax burden. [March 18, 2010]
 
How long should small businesses keep tax records for?
A new guide has been produced explaining which tax records small businesses (including the self employed and limited companies) should keep, and for how long. [February 25, 2010]
 
Tax relief and Christmas entertainment
We look at how staff parties are treated for tax purposes by HMRC, and what you should bear in mind when an employer provides an employee with seasonal gifts. [December 4, 2009]
 
Paying private bills through your company
You need to be aware of the tax consequences of paying for personal bills via your business - the rules differ depending on whether you are trading as a sole trader, or as a limited company. [November 16, 2009]
 
Guide to Business Rates
This simple guide will help you understand what business rates you might have to pay, how to challenge the rates set, and even if you can claim any relief. [October 29, 2009]
 
How to make the most out of trading loss relief
Under concessions offered in the Finance Bill 2009, trading losses for businesses can now be carried back up to a maximum of three years. How the rules work. [October 13, 2009]
 
Claiming travel expenses from home to work - the rules
Whether you are a limited company director, or a sole trader, this article looks out how expense claims for home to work travel are treated by HMRC. [October 9, 2009]
 
How to manage Corporation Tax during a recession
Here are some useful tips to help small businesses manage their corporation tax liabilities during the downturn. [September 18, 2009]
 
How to register your company for corporation tax
One of your first duties as a limited company director is to register your company to pay Corporation Tax. How the registration process works, including which forms you need to complete. [August 5, 2009]
 



Click Here





Our Partners
Key Services
Key Services
Useful Guides
Click Here

© Bytestart Limited 2005-2010 - All Rights Reserved | Terms of Use | Site List | Website Feeds | Rss Feed RSS Feed

Business Insurance, Business Bank Accounts, Public Liability Insurance, Professional Indemnity, Startups, Limited Company, Sole Trader