What do I need to be aware of?

Since your limited company is a separate legal entity, all of its assets belong to the business rather than its owner. This means that you cannot just take money from your business like you would your personal business account. There are specific procedures which need to be followed and any money going in and out of your business bank account must be accounted for.

What options are available when I withdraw money from my limited company?

There are four ways which you can withdraw money from your company’s account into your own:

1. Salary
2. Dividend payments
3. Director’s loan
4. Reimbursement of expenses

Salary

Taking a salary from your business bank to your personal account is a straightforward process. It’s unlikely that the majority of your income will come from a salary, but it can be a useful method to provide yourself with a monthly pay packet. In order to pay yourself via a salary, your company must first be registered with HMRC. You will be required to deduct all tax and National Insurance contributions and Employers National Insurance Contributions. This is paid directly to HMRC on either a monthly or quarterly basis. HMRC will also require monthly submissions to confirm this salary information.

The personal allowance is currently set at £12,570. This means, providing you have no other relevant income within the tax year, you can draw a salary up to this amount without the need to pay income tax.

Dividend payments

Once your company makes a profit, it will need to pay a percentage as corporation tax, but whatever is left can be paid to directors and shareholders in the form of dividends. Dividends are a way of dividing up the company’s profits and distributing them to directors and shareholders as a percentage based on the proportion of the company they own.

Limited companies can issue dividends at the end of the financial year, and at points throughout the year, which is common when the directors or shareholders rely on the dividends for income.

The company directors must declare dividends and a payment date agreed at a board meeting after which, the shareholders should be issued with a dividend certificate. This procedure should be followed fully even if the company only has one director.

Dividends are usually more tax-efficient than paying yourself a salary, which is why most business directors choose them to make up the majority of their income.

You can find more information in our guide to dividends.

Director’s loan

A director’s loan allows you (as the director) or a family member to either lend money from the business, or from the business to borrow money from your own funds. This loan needs to be repaid to your business account within nine months of the end of the financial year to avoid an additional repayable tax charge (S455 charge). If your business is new, it can be helpful to pay a small loan to help with things like startup costs.

The tax liabilities and any interest payable concerning loans depend on the balance and the length of time for which the account is overdrawn. If the company owes money to a director, then that sum can be withdrawn at any time without incurring any tax liabilities. All transactions must be recorded in a director’s loan account. At the end of the financial year, this record must also be recorded on the balance sheet of your annual accounts.

If you are a company shareholder as well as a director, you may have to pay tax on your director’s loans owed to the company.

Reimbursement of expenses

Any cost that you have incurred personally which has been made ‘wholly and exclusively’ for the purpose of your business can be claimed as a legitimate business cost. Therefore, not only will your business receive tax relief on these expenses, but you will also be able to reimburse yourself personally for the cost.

These costs typically include business miles, insurance, and equipment but can include any cost which was necessary. Although business expenses will not make up a large portion of your overall take-home pay, this is an additional and tax-free method which many directors find useful.

For more information about claiming the cost of expenses and to find out what is classed as a business cost, visit our expenses hub.