How to extract profits out of a limited company
In this article, we look at the most tax efficient ways to withdraw profits from your company. Utilising the best method for your particular circumstances allows you to maximise your take-home pay and therefore save on paying unnecessary taxes.
There are a few different ways to pay yourself through your limited company, and as mentioned, the method which you choose will depend on your circumstances. This article is only a guide however and should only be used as a general guide to this process and we recommend you seek advice to discuss in more detail.
Basic methods to withdraw funds from a limited company
There are effectively 4 ways which you can withdraw money from your company’s account into your own:
- Salary payments
- Dividend payments
- A director’s loan
- Reimbursement of expenses
Directors taking salary payments
Taking payments via salary earnings means that they are subject to additional higher tax bands and are also subject to national insurance. It is therefore recommended to take a small amount via this method and consider dividend payments to reduce tax liabilities.
Taking money from a limited company as a dividend
A dividend is a payment made to shareholders out of a company’s taxed earnings. Depending on the level of dividends received, shareholders will pay:
- No additional tax on dividends received up to £2,000 a year.
- Dividends that form part of the basic rate band will be charged a hybrid tax rate of 7.5%.
- Dividends that form part of the higher rate band will be charged at 32.5%.
- Dividends that form part of the additional rate band will be charged at 38.1%.
Because dividends are a return to shareholders they are not treated as earnings from employment and consequently, no National Insurance arises.
For this reason, there is a tendency for directors/shareholders to minimise salary payments and maximise dividend payments.
A directors loan
Taking out a director’s loan can give you access to more money than you are currently receiving via salary and/or dividends. Director’s loans are typically used to cover short-term or one-off expenses.
A director’s loan must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax penalty. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (known as S455 tax). Fortunately, you can claim this tax back once the loan is fully repaid – however, this can be a lengthy process.
Reimbursement of expenses
A company can reimburse an employee or director for business expenses incurred privately such as mileage claims, travel expenses, subscriptions, mobile phones and use of home as office. This is a great way of extracting funds from the company that are allowable and tax free to directors.
Planning is key
It is rare for the tax position of individuals to be the same and for this reason, working out the most efficient way to withdraw funds in an article such as this is futile. This article should therefore only be considered as a basic guide and not your withdrawal strategy.
In addition, it is not just a question of considering the strategy that produces the lowest tax bill. For instance, if salaries are to be minimised Living Wage rates and entitlement to benefits – particularly the State Pension – may need to be considered.
If it is some time since you considered your options, please get in touch so we can understand your specific circumstances and provide the best options for you.