Running a limited company provides flexibility and control over managing your finances. One crucial aspect of business management is understanding how to extract cash from your limited company in a tax-efficient and legally compliant way. Several methods are available, including paying yourself a salary, taking dividends, using director’s loans, or reimbursing business expenses. Each technique comes with its own set of rules and tax implications, so careful planning is essential.
This guide will walk you through each method and explain how to make the best choice for your situation.
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1. Paying Yourself a Salary
One straightforward way to take money from your company is by paying yourself a salary. This is particularly relevant if you’re both a director and an employee of your business.
How It Works
The company pays you a regular salary, which is treated as an allowable expense. This reduces the company’s overall taxable profits for corporation tax purposes. However, as an individual, you’ll generally need to pay income tax and National Insurance Contributions (NICs) on your salary.
Example:
- Salary paid: £12,570 (the personal allowance for tax-free income)
- Income Tax & NICs: None for the personal allowance. Anything above £12,570 will attract income tax at 20% or more and employee NICs.
Tax Efficiency Tip
Paying yourself up to the personal allowance level (£12,570 for the 2023/24 tax year) can help avoid income tax. Additionally, ensuring that salaries are low enough to stay within the employer’s NIC threshold avoids additional contributions while still qualifying for state benefits like a pension.
2. Taking Dividends
Dividends, or distributed profits, are another popular way to extract cash. They are only paid to shareholders and must come from post-tax profits (after the company has paid its corporation tax).
How It Works
Dividends don’t count as allowable expenses, so they don’t reduce the company’s taxable profits. Instead, shareholders pay income tax on dividends received above the dividend allowance.
Tax Rates on Dividends (2023/24):
- The first £1,000 is tax-free (dividend allowance).
- Basic rate taxpayers pay 8.75% beyond the allowance.
- Higher rate taxpayers pay 33.75%.
- Additional rate taxpayers pay 39.35%.
Example:
- Dividends declared: £10,000
- Taxable amount: £10,000 – £1,000 = £9,000
- Tax paid by a basic rate taxpayer = £9,000 × 8.75% = £787.50.
Tax Efficiency Tip
A combination of a low salary and higher dividends can minimize tax liability since the dividend tax rates are lower than income tax rates for higher amounts.
3. Director’s Loans
If you need to take cash out temporarily, a director’s loan could be the right option. This method involves borrowing money from the company instead of taking it as income. However, director’s loans come with strict rules and tax implications.
How It Works
You can borrow money from the company if the loan is repaid within nine months of the company’s accounting period. If not, the company will face additional tax charges known as the Section 455 tax (currently 33.75% of the outstanding loan amount).
Tax Considerations:
- If the loan exceeds £10,000, it is treated as a benefit-in-kind. You’ll need to pay personal tax, and the company must report NICs.
- Once the loan is repaid within the time frame, the Section 455 tax is refunded.
Example:
- Loan borrowed = £8,000
- Loan remaining after nine months = £0 (fully repaid).
- No Section 455 tax applies.
Avoid leaving loans unpaid long-term or using them regularly, as this may attract scrutiny from HMRC.
4. Reimbursing Business Expenses
If you pay for business-related expenses using personal funds, the company can reimburse you without any tax implications, provided the costs are wholly and exclusively for business purposes. Everyday allowable expenses include travel, office supplies, and marketing expenses.
How It Works
Receipts must support expense claims and be linked to the company’s operations. Reimbursements of personal outlays are not taxed as income.
Example:
- Business travel costs you paid = £300
- Reimbursement by the company = £300.
- There are no tax implications for you or the company.
Tax Efficiency Tip
Ensure accurate record-keeping and supporting documentation for all expenses to justify claims in case of a tax audit.
Additional Considerations
Balancing tax efficiency with compliance is essential when choosing the best way to extract cash. Below are some key points to consider:
Combine Methods
Many business owners adopt a mix of salary and dividends to take advantage of the tax-free personal allowance and the lower dividend tax rates.
VAT Implications
If your company is VAT-registered, watch out for VAT on any reimbursed expenses, such as travel or accommodation, to avoid unnecessary claims.
Seek Professional Advice
Tax rules are complex and subject to change. Hiring an accountant or tax advisor can ensure that you’re using the most efficient strategy for cash extraction.
Final Thoughts
Extracting cash from your limited company can be managed in several ways, each with advantages and tax implications. Whether you choose a salary, dividends, director’s loans, or expense reimbursements, the key is to stay compliant and plan strategically to minimize your tax liability. Combining methods can often provide the best results, but consulting a professional can help you tailor the approach to your unique circumstances.
By understanding the options and staying organized, you can extract cash efficiently, reinvest in your company’s growth, and secure its financial health.
FAQs
1. What is the most tax-efficient way to extract cash from a limited company?
A combination of a small salary up to the personal allowance (£12,570 for the 2023/24 tax year) and dividends is often the most tax-efficient method. This allows you to minimize income tax and National Insurance Contributions while benefiting from the lower dividend tax rates.
2. Are there any limits on how much I can take as dividends?
Yes. Dividends can only be paid from the company’s profits after corporation tax. You cannot legally declare dividends if your company has insufficient retained profits. Additionally, dividends above the dividend allowance are subject to income tax.
3. What happens if a director’s loan is not repaid on time?
If a director’s loan is not repaid within nine months of the company’s accounting period, the company must pay a Section 455 tax charge of 33.75% of the outstanding amount. This tax is refundable when the loan is eventually repaid.
4. Can I reimburse myself for personal spending on business expenses?
Yes, you can claim back any business expenses you’ve paid personally, as long as the costs are wholly and exclusively for business purposes. These reimbursements are tax-free, but you must maintain proper receipts and documentation to justify the claims.
5. Is it possible to take out all company profits as dividends?
While it is possible to distribute all post-tax profits as dividends, you should consider leaving some cash in the company for operational needs, future growth, or unforeseen expenses. This ensures the company’s financial health and avoids potential cash flow issues.
6. Can I take a salary from my limited company without paying National Insurance?
Yes, if your salary is below the National Insurance contribution thresholds. For the 2023/24 tax year, the lower earnings limit is £6,396 annually, and the primary threshold is £12,570. Staying within these limits avoids National Insurance contributions while building state pension entitlements.
7. What are the risks of taking regular director’s loans?
Repeatedly taking director’s loans or leaving them unpaid can attract attention from HMRC, which may view it as disguised remuneration. This could lead to penalties or additional tax liabilities, so director’s loans should be used sparingly and responsibly.
8. Do I need to pay VAT on expense reimbursements?
If your company is VAT-registered, consider whether the reimbursed expenses include VAT. Under VAT rules, only business expenses that are VAT-eligible can be claimed, and accurate records are vital to avoid issues during VAT inspections.
9. Can a director decide how much to pay themselves as a salary?
Yes, directors can set their salaries, but the amount should align with the company’s financial position and tax strategy. Paying yourself a high salary may attract unnecessary income tax and National Insurance liability.
10. Should I consult an accountant before extracting cash from the company?
It is always a good idea to consult an accountant or tax advisor for tailored advice. They can help you plan tax-efficient and legally compliant cash extractions, ensuring you maximize your earnings while meeting HMRC’s requirements.
