Making your business as tax efficient as possible is key to maximising profits and delivering investment for growth. From income tax to national insurance contributions and corporation tax, there is a lot of different taxes to take into account when running any limited company.
The most common way to take out money from a company is through a salary paid every month. But company directors can extract profits through dividend payments, loans and pension contributions.
How do I legally take money out of a limited company?
As a company director there are 5 legal ways that you can take money out of a limited company and how you do this will define how tax efficient your approach is.
- Dividend payments
- A standard salary
- Company bonuses
- A director’s loan
- Pension contributions
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If you are a director of a limited company, you will have access to shares that release dividends from the business and you will be able to draw on these at certain times. Once salaries and tax liabilities have been paid, the profits from your company can be divided between directors and shareholders in the form of dividends.
These are generally one-off payments that are issued at the end of the financial year. The amount given depends on the percentage of the company that an individual owns or has invested their money in.
Larger companies may well issue dividends at several points throughout the year depending on performance and how much this is will dictate whether you will be paying tax on the income.
A dividend needs to be agreed at a board meeting which will decide the amount to be paid and the date that payment will be issued to the company directors or shareholders. This is a useful and tax efficient way to get paid for directors.
In short, the first £1,000 of your dividends is tax free. Above this, there is a dividend tax. The lower rate is 8.75% and the higher rate is 33.75%, depending on the size of the dividend.
For example, if you have a salary of £25,000 you will pay the normal income tax and national insurance as an employee. If you are given £5,000 in dividends, you will not pay tax on the first £1,000 and just 8.75% on the remaining £4,000 (as opposed to the basic income tax rate of 20% if that amount was taken as salary).
The most common way to take money out of a business legally is through a salary which is paid into your personal bank account.
You pay the normal income tax depending on the amount you ‘earn’ along with employers’ national insurance contributions:
- Up to £12,570, you will pay no income tax and between £12,571 and £50,270 you will pay the basic rate of income tax of 20%.
- Class 1 National Insurance contributions kick in when you earn more than £1,047.50 a month and are charged at a rate of 12% on all income above this level (up to a maximum of £4,189 when the rate reduces to 2%).
Companies will often issue bonuses to directors as a reward if the business is exceeding expectations. Bonuses are considered as part of the salary so you will need to pay the appropriate tax and national insurance according to your personal allowance and tax obligation.
If you decide to take a non-cash payment, such as a car, these may be subject to different rules and less taxation, which Direct Peak will be able to advise accordingly.
Another way to legally take money out of a limited company’s balance sheet is to receive it as a director’s loan but this can cause difficulties if not handled properly. All transactions of this type need to be recorded and have to be transparent.
A director’s loan is a low cost way to take money out of the business but is generally a short-term solution and needs to be repaid ideally either before the end of the financial year, or within 9 months after the year end.
If the sum is over £10,000, it is considered as an income and you may need to pay tax particularly if it is not paid back within a certain timeline.
Finally, the other way to take income out of the company is through pension fund contributions.
If you are earning up to £125,000 you have a personal allowance of £60,000 a year you can invest into your pension fund. Your Limited Company can make ‘Employer Contributions’ into your personal pension scheme up to this value, but you will not be able to access the money until your retirement date.
It is likely you will need an independent financial advisor (IFA) to process this for you. If you don’t have one, Direct Peak would be happy to pass the details on of our recommended IFA to use.
Get in contact with Direct Peak today to help you identify what is the best way for you to extract funds from your company in the most tax efficient way!
Direct Peak provides a dedicated business tax accountant, who will prepare your annual accounts and tax returns. They will be on hand to answer any tax queries you have.
Your business tax accountant will ensure that the company is set up in the most tax-efficient way and that you are claiming for all the correct expenses to maximise your earnings.