Tax efficient remuneration – limited companies

Taking money out of your limited company

A limited company is a separate entity in the eyes of the law, just like an individual person. This means that you cannot simply take money out of a limited company account like it was your own personal bank account.

All finances legally belong to your company in the first instance, so you must follow certain procedures to take money out of your business.

Below I list 4 primary ways in which funds can be withdrawn from a limited company:

  • Paying yourself a director’s salary
  • Issuing dividend payments from available profits
  • Claiming expenses for business-related items you buy with your own money
  • As a directors’ loan. All finances must be transferred through the correct channels and accurately recorded in your company’s accounting records.

 

Paying yourself a director’s salary

As a director, you can pay yourself a regular salary through PAYE. To do so, your company must be registered with HMRC as an employer.

We have provided a brief guide on taking a salary which can be downloaded via http://bit.ly/tac-salary21ex

A table summary  of different salary rates is provided below.

 

Taking dividends

From 01 April 2018, the dividends allowance was reduced to £2,000. Please note that it remains the same.

This means that you get only £2,000 tax free in dividends. Dividends above £2,000 and up to approximately £37,500 will be taxed at 7.5%.

Dividends greater than the threshold above will be taxed at 32.5%.

Dividends can be drawn monthly, bimonthly, annually or at any time. However, certain procedures should be followed. Please obtain our guidance “Dividends: How to pay and process” by clicking here

As summarised on the table below, it is possible to earn up to £50,000 in personal income and pay just under £3,000 in tax.

 

 

 

Note the following:

  • Estimated based on 2021/22 tax rates
  • Calculated based on £37,500 in dividends for the year
  • Dividends payable from distributable profits in company
  • Corporation tax payable on company profits of 19%

 

Claiming business expenses

There may be times when you have to pay for business expenses out of your own pocket, but you can reclaim this money from your company by keeping receipts and completing claim forms, provided the expense was for business purposes only. The types of tax-deductible expenses you can claim include:

  • Travel and accommodation
  • Mileage and parking charges
  • Mobile phones
  • Entertainment
  • Meals
  • Computer and office equipment
  • Training fees
  • Postage costs
  • Other costs incurred wholly and exclusively for business / trade

 

Your company can reimburse expenses every month when you receive a salary, or at any other interval that is convenient. The company must retain all receipts for at least 6 years and record the expense refunds in its accounts.

 

Director’s loan

Additional funds for private use may be taken as director’s loan and labelled as ‘DCA’ or Director’s Loan on the bank statement.

Just like most loans, the idea is to repay the amount borrowed from the business.

Where the balance on the director’s loan account is greater than £10,000, this may be subject to additional company tax at 32.5%

If overdrawn and unable to repay, we will in the first instance make adjustments to your dividend account when preparing the statutory accounts and corporation tax returns.

Full details on director’s loans and loan accounts are available from GOV.UK (https://www.gov.uk/directors-loans)

If you would like to discuss issues arising from this article or to find out more on the applicable tax exemptions, please contact Tobi Lab via hello@thetacuk.com