What are the best ways to take money out of your company? This is the most common question asked by many clients.
You choose to operate your business as a limited company for various reasons. One of the top reasons is normally so that you can have protection under “limited liability” and the other is tax planning.
In recent years the tax planning advantage of operating as a limited company has diminished to a certain extent. But many clients are still using a company as their business vehicle. You need to know how to best take the money out of your business.
Director’s salary is the most common way to withdraw money from the company
As a director your main role is to run the company for the shareholders and in a small business it is normally the same people.
The money in the business does not belong to you as the director because it belongs to the company which is a separate legal entity. But ultimately to the shareholders.
As director of a company, you are like any other employee and so you can go on the payroll. Normally you’d choose to take a small salary within the secondary threshold for National Insurance (NIC). This means neither you nor the company will incur any NIC or PAYE liability.
The advantage of this action is you will still receive the credits for your future state pension.
Dividends are paid to the shareholders of the company.
Most owner-shareholders will choose to supplement the lower salary with higher dividends.
This is a very tax-efficient way of drawing money out of your company because you will only pay tax at
- 8.75% (2023/204) if you are a basic rate taxpayer.
- 33.75% for higher rate taxpayers
- 39.35% for an additional rate taxpayer.
What’s more, dividends do not attract NIC.
Another advantage is that the first £1,000 worth of dividends (assuming you have no other dividends) is completely tax-free, although this is being reduced again next year.
Is there a director’s loan account balance in the company
If you have lent money to the company at any time and there is still a balance due back to you, you are entitled to take this out. Taking back what is owed to you does not have any tax implications.
You could also choose to charge your company interest on this loan. But be careful because there are some forms to submit quarterly to HM Revenue & Customs (HMRC) and you will need to deduct tax and pay it over.
You can also borrow money from your company in the short term. But be mindful because it does need to be repaid at some point.
If you are borrowing money from your company, there will be tax consequences. You can be “overdrawn” by £10,000 and not have personal tax consequences. But if the loan is more than £10,000 you’ll need to complete a form P11d and you’ll need to pay tax on the “benefit”.
If the loan remains outstanding nine months after the Company’s year-end then your Company will also have to pay a charge. Earlier this charge was 25% but this is now 33.75% for loans made after 6 April 2022.
Pension contributions can be a way of taking money out of the company
Your company can make pension contributions for you. The introduction of the workplace pension scheme has meant you now need to offer a pension scheme to all your eligible employees. But as a director, you may choose to have a superior plan and with much higher employer contributions.
The annual allowance for contributions has now increased to £60,000, although you can also utilise unused allowances in earlier periods as well.
What are the other perks your company can provide for you
How about other benefits your company can provide for you? Here are the top three that you should think about:
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Mobile Phone
Your company can meet the cost of your mobile phone. As long as certain conditions are met this can be tax free. It is really important that the contract is set up with the company and not you personally and you can only have one phone.
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Private Medical Cover
There has been a huge uptake in private medical cover in recent months. Your company could pay for yours. The company will receive tax relief and there is a benefit to be reported on the P11d.
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Mileage Allowance
Where you use your own car for business purposes you are entitled to claim mileage allowance. The allowance is tax-free so long as you don’t exceed the HMRC rates. The current tax-free rates are 45pence per mile for the first 10,000 business miles and 25pence thereafter. Remember commuting from home to work is not business.
What next
It goes without saying everyone’s personal circumstances are different so you should not take any actions without talking to your accountant. This arena of remuneration planning requires careful consideration.
Please contact your normal manager if you are working with us and have questions. If you are not yet working with us and would like to find out more get in touch. We’d love to hear from you.