Tax Efficient Ways to Draw Monies from Your Company
Your Limited company is a separate legal entity to you which means that all business monies and assets belong to the company, not you the director or owner of the business. You cannot simply withdraw money from the business in the same way as a sole trader can, you must follow the correct procedures.
The four ways you can take money out of a limited company are:
A director’s salary
Repayment of expenses
A director’s loan
Running a Limited company can be very tax efficient. By extracting profits using a combination of the above methods you can minimise personal tax and National Insurance liabilities. A company’s taxable income (profits minus costs and overheads) is liable for only 19% corporation tax, as opposed to Income Tax of 20% – 45% that sole traders have to pay.
Income Tax rates for 2019-20:
20% on taxable income up to £37,500
40% on taxable income between £37,501 – £150,000
45% on taxable income above £150,000
Alternatively monies can be retained in the company until the Company closes at which point Capital Gains tax will apply.
As a director of your company you are essentially an employee and can receive a salary. Your company will need to register for PAYE with HMRC and run regular payroll reports that need to be submitted through Real Time Information (RTI). We can do this for you as part of our service.
Your company must deduct Income Tax and Class 1 NICs from your salary every pay period and pay this money to HMRC on a quarterly basis.
A salary is a tax-deductible expense that is paid out of company profits before corporation tax, so companies do not pay any tax on this money.
You can choose to pay any level of salary; however there tend to be some common strategies.
You can pay yourself up to the primary NIC threshold of £8,632 for 2019-20, but below the Personal Allowance limit of £12,500. This salary level will give you a qualifying year for state pension entitlement, but incur no Income Tax.
Many other contractors choose to take a salary of £12,500 in order to utilise your full personal allowance.
You can consider employing another staff member, perhaps your partner, spouse or adult family member to carry out administrative tasks. In this way they too can utilise their full personal allowance and with a second employee you are able to claim Employers Allowance up to £3,000 against your Employer’s NIC costs.
Repayment of expenses
Make sure that if you incur business expenditure on behalf of the company you reclaim this. Your company can re-imburse you for these business costs without any personal tax implications.
Your company will obtain Corporation tax relief on all legitimate business expenses at 19% for 2019-20.
As you are not only a director but also a shareholder, you can take additional income from the company as dividends, assuming that the company has available profits after the deduction of 19% corporation tax.
The first £2,000 of dividends in any tax year are tax free and above that level you will pay the following rates depending on your income tax band;
Basic rate: 7.5% up to £37,500 annual income
Higher rate: 32.5% between £37,501 – £150,000 annual income
Additional rate: 38.1% above £150,000 annual income
Dividends do not attract National Insurance.
Directors Loan Account
The purpose of a director’s loan is to allow a director to borrow money from a company or a company to borrow money from a director. These transactions must be recorded in a director’s loan account within the company’s books and records.
A loan account will record a running balance of all money paid to or removed from a company by a director – account balances will show as ‘in credit’, ‘nil’ or ‘overdrawn’.
There are tax implications to directors’ loans for both you and your company so you should consider this option very carefully.
If a company owes money to a director, a director can remove this sum from the loan account at any time without facing any tax liabilities.
If you owe money to the company, the company can charge interest on that loan. The interest will be taxable income for the company. Assuming the interest rate is commercial rate there will be no tax liabilities for you.
If the company lends money to you and does not charge you interest the loan will have to be included in the Company Tax Return and your Self Assessment tax return. Tax liabilities for overdrawn accounts depend on the amount of money you owe to the company and the length of time the loan account has been overdrawn.
In most cases, there will be no tax implications if an overdrawn loan account is for £10,000 or less and is repaid within 9 months and 1 day from the end of the company’s accounting reference date (ARD). If the overdrawn loan is not repaid within that time, the company may have to pay 32.5% of the outstanding amount as corporation tax.
If you owe your company more than £10,000, this sum must be declared on your P11d and Self Assessment tax return, and the official rate of interest may be applied. A loan from a company to you is classed as a ‘benefit in kind’. Class 1 National Insurance must therefore be deducted through payroll.
If your company writes off your director’s loan, you must pay Income Tax on the loan amount through Self Assessment because the loan is treated as a form of taxable income.
Leaving surplus profits in the company
You may decide that you do not need or want to draw all available funds from the company on an ongoing basis. The flexibility of a limited company structure allows you to leave surplus income in the business and withdraw it in a future financial year. You can choose to draw dividends in the tax period that is most beneficial for your overall personal liability and is a great option if removing this money would result in a higher personal tax rate or dividend tax rate in the current financial year.
When the time comes to finally close your company down, assuming you qualify it is possible to withdraw the final funds as a capital distribution and apply capital gains tax. An annual allowance for Capital Gains tax is available; it is £12,000 for 2019/20.
Capital gains tax is chargeable at 18% or 28% depending on whether you are a basic rate or higher rate tax payer. Entrepreneurs relief may be available on this disposal of your business and would mean that any gain is taxed at 10%.
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