How to Take Money out of a Limited Company

Paying yourself through a company

Paying yourself through a limited company differs from paying yourself as a self-employed sole trader. You and your company are not one and the same in terms of finances and liabilities. Rather, the company exists as an entirely separate entity in the eyes of the law. This means that all business income belongs to the company in the first instance.

To take money from your company as personal income, you can:

• pay yourself a salary through Pay As You Earn (PAYE)
• issue dividend payments from available company profits
• reimburse yourself for business expenses
• take a director’s loan to borrow money from the company or reclaim money you’ve previously paid into the business

Most company owners use accountants to deal with their business finances and tax affairs. We always recommend seeking professional advice to ensure your new company is as tax-efficient as possible. Whilst you may be reluctant to pay accountancy fees, it is often a false economy to take the DIY approach to company finances and accounting.

Taking a director’s salary

Most company directors take a salary. If you plan to pay yourself (or any employees) more than £123 per week (£533 per month; £6,396 per year), you’ll need to register your company as an employer with HMRC and operate PAYE as part of your payroll.

Through PAYE, the company will deduct Income Tax and Class 1 National Insurance contributions (NIC) if your salary is more than £12,570 per year (£242 per week; £1,048 per month).

Additionally, the company may have to pay Class 1 employer’s NIC if your salary is more than £9,100 per year (£175 per week; £758 per month).

If you plan to run payroll yourself, you’ll be responsible for reporting all employees’ payments (including your director’s salary) and deductions to HMRC on or before each payday. Your payroll software will calculate the amount of Income Tax and NIC you owe. The company will then pay the deductions to HMRC each month.

How much should I pay myself?

You can pay yourself whatever you like, provided the company has enough money to cover the salary. However, many directors take an annual salary above the NIC Lower Earnings Limit (£9,100 per year) but below their annual tax-free Personal Allowance (£12,570).

If you keep your salary below the Lower Earnings Limit (LEL), you won’t have to pay any Income Tax or National Insurance contributions on these earnings. The same is true if you take more than the LEL but less than the Personal Allowance. However, the company will be liable to 13.8% employer’s NIC on the portion or salary above £9,100.

Salary income above the Personal Allowance threshold is subject to Income Tax of 20% to 45% (or 19% to 48% if you live in Scotland) and employee National Insurance contributions of 8%.

Issuing dividend payments

If your company has sufficient profit after accounting for all business costs and taxes, you can pay yourself shareholder dividends on top of your director’s salary. The percentage of company profits you’re entitled to depends on your shareholdings. For example, if you hold 50% of the company’s shares, you’re entitled to 50% of the profits.

Dividends are paid from company profits after the deduction of Corporation Tax, which is charged at rates between 19% and 25%, but you won’t pay Income Tax or NIC on your dividends. Instead, you’ll pay dividend tax at rates between 8.75% and 39.35%. The first £500 of dividend income you receive in the year is also tax-free.

By taking some of your income as a salary and the rest as dividends, you’ll pay less tax overall than if you were to take all of your income as a salary. The savings are modest for lower earners, but more significant if you earn more than £50,000 per year.

How to issue a dividend

How dividends are issued depends on the rules and restrictions set out in the company’s articles of association. You should check your articles in the first instance.

Typically, as per the Model articles, the directors will declare (approve) interim dividends at a board meeting or by passing a written board resolution. Interim dividends are those paid throughout the financial year, usually on a monthly or quarterly basis.

The procedure is usually different for final dividends, which are those issued at the end of the financial year after the annual accounts have been approved. Normally, directors recommend the final dividends. The shareholders then declare the dividends by passing an ordinary resolution at a general meeting or by written resolution.

You’ll need to follow the procedures set out in your company’s articles, even if you are the only director and shareholder in the company. This is simply a formality.

When you declare a dividend, you must write up a dividend voucher with the following details:

• date of issue
• name of your company
• name of the shareholder being paid the dividend
• total number of shares held by the individual
• total dividend payable
• signature of the director or company secretary

You should provide a copy of the dividend voucher to the recipient of the payment and keep another copy for the company’s accounting records. You can get dividend templates online or from your accountant.

Reporting dividends to HMRC

Since dividends are not issued and taxed through PAYE, you must report this additional income to HMRC on a Self Assessment tax return. Our Self Assessment guidance for company directors and shareholders provides more information on these requirements.

Taking a director’s loan

A director’s loan is another option for taking money out of your limited company. The loan may be:

• money that a director borrows from the company
• money that a director lends to the company
• a reimbursement of personal funds that a director has previously paid into the business

If you take more money from the company than you put in (other than by way of a salary, dividends, or expenses), the payment will be classed as a director’s loan. All such payments must be recorded in a director’s loan account on the company’s balance sheet.

Typically, a tax liability will arise if you borrow more than £10,000 from the company and/or do not repay it in the same accounting period.

If you repay the loan after the end of the accounting period in which you took it, the company may have to pay Section 455 tax at 33.75%. However, you can reclaim the tax once the loan is settled in full.

When a loan from the company is written off or not repaid in full, you’ll need to pay Income Tax and NIC on the outstanding loan amount.

If you lend money to your company and you later wish to reclaim it, no tax liability will arise, but the company may be required to pay you interest on the loan amount.

The tax implications and accounting requirements of a director’s loan can be complex, so it’s best to seek professional advice from an accountant and only use loans when absolutely necessary.