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How to take money out of a limited company
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What is the best way to extract funds from a business?
Most company directors understand the importance of keeping their personal and business finances separate, but what happens when you want to take money out of the company?
You have several options open to you, and although it’s not considered best practice, you can take money out of a limited company whenever you like, as long as you do it in the right way.
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As an employee of the business, it makes sense that company directors are paid a salary, and just like any other employee, they must pay income tax and National Insurance contributions (NICs) on their earnings.
Most company directors take a small salary out of the business. Typically up to the National Insurance contributions primary threshold of £12,570 a year (2022/23) to avoid paying income tax and NICs, but over the lower earnings limit of £6,396 so they still qualify for benefit entitlements and the state pension.
You can also claim for any business expenses you pay for out of your own pocket. You must keep receipts and complete claim forms and include the expenses in your self assessment tax return to avoid paying tax on this money. You can reimburse yourself when you receive your salary or at any other time.
Dividends are a way of dividing up the company’s profits between the directors or shareholders and are a very tax-efficient way of taking profits out of a limited company. Dividends are paid from the profits that are retained in the company after corporation tax has been deducted. The first £2,000 of dividend income every year is free. After that point, you pay dividend tax at a basic rate of 8.75%, a higher rate of 33.75% and an additional rate of 39.35%.
It’s usual for limited companies to issue dividends at the end of the financial year, but you can also do so at various points throughout the year. The dividend payments must be declared and a payment date should be agreed on at a board meeting. It is important to remember that dividends can only be paid if the company has sufficient profits; if this is not the case, they may be classed as unlawful dividends and you may have to repay these to the company.
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Another way to take money out of a limited company is in the form of a director’s loan. This can be another tax-efficient way of doing so as long as it is handled correctly. You can use a director’s loan to borrow money from the company or to lend money to the business from your personal funds.
If you borrow more money from the company than you have previously put in, the director’s loan account is ‘overdrawn’. All loans to or from the company should be kept in a director’s loan account and shown on your balance sheet.
If your director’s loan account is overdrawn by less than £10,000, there are no personal tax liabilities to pay. However, the company may have to pay something called Section 455 tax at 33.75% if your director’s loan is not repaid within nine months and one day from your company’s accounting reference date.
If your director’s loan account is overdrawn by more than £10,000, the loan must be declared on your self assessment tax return and tax is payable. Your company will also have to pay Section 455 tax on the overdrawn amount.
Provided that the company can pay all its creditors before it’s shut down, you can use a process called a Members’ Voluntary Liquidation (MVL) to close the business and distribute the money among the shareholders. In this case, the money paid to the shareholders is treated as a capital distribution and incurs a low tax rate.
This process can be a very effective way to close a business that has come to the end of its natural life. It allows the directors to wind up the business’s affairs properly and extract the value in a tax-efficient way.
If you have any questions about Members’ Voluntary Liquidations or if you are concerned about an overdrawn director’s loan account, please contact us for a free phone consultation. We have an extensive network of 100+ offices offering confidential director support across the UK.
Further Reading on How to take money out of a limited company
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