Taking money from your limited company. What are the options?

If you're a director of a limited company, there are a number of ways of extracting money. But which is right for you? Chartered Accountant Tom Johnson takes a look at the choices available.

Choosing to set up a limited company and becoming a director can be significantly more tax-efficient than working as a sole trader. As a limited company director, you have access to a variety of methods to maximise your take-home pay.

The last thing you want to do is give away too much of your hard-earned cash by operating in a non-tax efficient way. When it comes to paying yourself, there are a few ways you can do this:

• Salary
• Director's loan
• Reimbursement of expenses
• Dividend payments

Of course, the method that is best for you depends on a number of factors personal to you and your business. It's always good to take advice from an accountant, but here are some general suggestions to help you approach the issue:

Director's Loan

A director's loan is when you get money from your company that is not salary, dividend, or expenses – more commonly known as 'drawings'. You must ensure you keep records of all money loaned to director(s) and amounts paid back as well as ensuring that a director does not owe the company at the year-end. Otherwise, additional taxes, such as S.455, may become applicable.

Reimbursement of Expenses

Any cost which you have incurred personally, which has been made exclusively for the purpose of your business, can be claimed as a legitimate business expense. Whilst your business will receive tax relief in the form of VAT and Corporation Tax on these expenses, you will also be able to reimburse yourself personally. Make sure to claim any pre-incorporation expenses, as they can be claimed for up to seven years before a company is incorporated (only four years for claiming input VAT on goods).

Dividend payments

Once your limited company has started making a profit, these profits will be subject to Corporation Tax of 19% (2022/23 tax year). If your company has positive reserves after accounting for the Corporation Tax, the balance is available to be paid to shareholders in the form of dividends.

The first £2,000 of dividends paid to each individual is tax-free, and the dividend tax rate is 8.75% for basic rate taxpayers, compared with 20% for salary (2022/23 tax year). Therefore, as long as you have sufficient retained earnings, dividends are a very tax-efficient method of withdrawing cash.

Dividends can be paid at any time during the year, but the directors will need to hold a meeting to declare the dividend if a majority approves. You must consider carefully the future impact of taking profits out the business. If you are expecting to have a downturn in results in the coming financial years or are looking to expand the business, this may not be the most suitable option. 

If you would like to discuss any of these issues in more detail, please do get in touch. Call 0115 955 5500 or email enquiries@pagekirk.co.uk.