Once you’ve set up your limited company, you might think that you can take from your company’s account as you see fit. Business owners who operate with this attitude ‘what’s yours is mine’ will soon discover themselves in difficulties.
Once a limited company is incorporated at Companies House, it becomes a separate legal entity. The company’s entire profits and assets belong to the company itself, and not to the business owner.
Hence, you cannot simply dip into the company’s asset-base like a sole-trader, whose business and personal assets are the same. All finances must be recorded with accuracy and correct channels must be used for transferring them.
If you are the owner of a limited company, there are four methods you can adopt in order to legally draw out money from your business bank account. On the other hand, you must first confirm certain procedures such as tax and other financial liabilities before plunging into it. So, what are the four methods? Let’s take it from the top!
Money can be drawn in the following ways:
- Paying yourself a director’s salary
- Director’s loan
- Dividend
- Reimbursement of expenses
1. Director’s salary:
Directors are considered to be the employees of the company as like other staff members. If you are a business shareholder, then you can consider paying yourself a regular monthly salary through PAYE. To do so, your company has to be registered with HMRC as an employer. Secondly, you’ll have to register yourself for self-assessment to report this regular income.
Based on your salary, National Insurance Contribution (NIC) and Income Tax will be deducted and paid directly to the HMRC by your company. Most company directors choose to take themselves a small salary, up to the NIC threshold of £8060. Paying this level of a small amount as salary qualifies them for the state pension and benefit entitlements without having to pay the personal tax. If you are a shareholder in the company, then you can also take additional income in the form of a dividend.
2. Director’s loan:
Director’s loan is when you take money out of business which is otherwise not a salary or a dividend. It’s another effectual way to take money out of the company but the process must be handled with utmost care. This type of transaction must be recorded in a director’s loan account and maintained accurately. A clear running balance of the transaction between the company and the director himself must be recorded.
The account balance will be ‘in credit’ if the director repays more than the actual loan amount into the company. The account balance will be ‘over-drawn’ if the director withdraws more money than he had paid initially. Director’s loan account transaction has to be listed in the company’s balance sheet and included in the company’s tax return and director’s self-assessment return.
2.1. Overdrawn loan amount:
If the director’s overdrawn amount exceeds by more than £10,000, the sum must be declared on his self-assessment tax return and the appropriate tax rate will apply. In most cases, directors with overdrawn loan account might not be required to pay tax as long as the sum is repaid within nine months and one day of the company accounts reference date.
2.2. Partial loan amount:
If you own less than £10,000, then you will not have any personal tax liabilities but there may be tax consequences for your company.
2.3. Loans written off:
If your loan is written off, then class 1 NI must be deducted by your company through payroll. You will be required to pay Income tax on the loan through self-assessment. More information is available on GOV.UK.
