Whether you’re new to running a limited company or have been trading for years, there are four main ways to take money out of your business.
These are:
- Salary – this is when you pay yourself as an employee of your company. A payroll scheme is set up and tax and National Insurance is deducted from your earnings, often referred to as PAYE (Pay as you earn).
- Benefits in Kind – benefits in kind are like a salary, but instead of being paid in cash, you are paid in benefits. This could include personal use of a company vehicle, private medical insurance, or private fuel reimbursement. The tax is calculated using the same rates as a salary, based on the monetary value of the benefit received.
- Dividends – so long as your company makes sufficient profits after paying corporation tax, the remaining funds, sometimes referred to as reserves, can be taken as dividends. Like with the salary, these two can be combined to take a tax efficient salary.
- Directors loan accounts (DLA) – the final way that you could possibly take funds from your company is via a “Director’s Loan”. This is essentially an account that records any value of money spent or received from you, the director, whether paying into the company (the company owes you), or taking money out (you owe the company). When the company owes you, things are usually quite simple. If the company has sufficient funds, you can withdraw what’s owed to you tax-free, as the money you initially contributed has already been taxed. The company may owe you for various reasons, most commonly for funds you introduced during incorporation or unpaid dividends and salary. However, it gets complicated and potentially costly if you take money from the company that you didn’t previously lend. Like any loan, it must be repaid—and the timing of repayment affects the tax implications.
Paying back a Director Loan that you owe the company
If you pay the company back within 9 months of the end of the accounting year from which you owed money, you can avoid any potential tax implications all together. But if you take more than 9 months after the year end to pay back your company, you will have to pay a loan tax referred to as Section 455. Currently the tax rate is 33.75% of the amount you have borrowed from the company. For example, if you took funds from your company, and at the end of the tax year, you owed your company £100k. Your company would have to pay additional tax of £100k x 33.75% = £33,750. However, you can reclaim this tax back, when the loan is repaid. Partial repayments can also mean that some of the tax can be reclaimed.
Other things to keep in mind
- Interest – if you owe your company money, and said loan is over £10,000 at any point, your company will charge interest on this amount at the HMRC base interest rate (see HMRC website for updates), just like any normal loan with a bank.
- Common Issues – it is quite common, and quite understandably very convenient, to use your company bank card for a few personal transactions here and there, and also, to have that hypothetical personal insurance subscription running as a direct debit through the bank. But it is precisely this carefree take on spending that can cause problems. Your company bank account is not your bank account.
- Director loans must be done properly to avoid breaching company law.
In conclusion, the best way to avoid this all together, is to not draw money from the company at all unless you really need to. If you’re looking to take money out more efficiently, having a clear tax plan in place can make a big difference.
Make sure you are in constant contact with your financial advisor and accountant to ensure that the current way you are taking money from your company is sufficient for you and your company’s needs, and that you are being as tax efficient as possible. If you’re unsure, review your bank account or accounting software for clarity. And if you accidentally use your company card for personal expenses, simply reimburse the amount from your personal account. For help with this or any other queries you might have please get in touch with us.
