Taking money from your Limited Company and the associated tax implications

If you find yourself needing to take money out of your Limited Company there’s a few things you’ll need to be aware of before you do so, one of which is the tax implications.

In this blog we take a look at the considerations you’ll need to make, and the process involved.

How it works

Regardless of whether you want to borrow money for a short or long time, in either a small or large amount, you’ll first need to know how much you have in your business account to account for tax, staffing costs, and other business depreciation elements.

As the director of your own Limited Company, you’ll need to ensure that any money taken is documented. This is done in the form of a Director’s Resolution, which is a formal record that shows exactly how much was taken, and provides a formal paper trail for your records and possible future reference. If your loan amount exceeds £10,000, under the Companies Act you’ll need to get approval from any other shareholders (if there are any) in writing.

Taking money out of your Limited Company legally

To take money from your company legally, you must do so in one of the following ways:

• Pay yourself a director’s salary
• By issuing dividend payments from available profits within the company
• In the form of a director’s loan
• By claiming expenses for business-related items

Director’s salary

Most Limited Company directors will pay themselves a small, reoccurring salary through HMRC’s PAYE system. Depending on how much salary you pay yourself, you might have to pay National Insurance Contributions (NICs) and/or Income Tax. Salary payments are a tax-deductible expense, so your company will not have any Corporation Tax liability on this money. Whilst this is the case, your company will still need to pay 13.8% Employer’s NICs on any salary earnings that fall above the NIC Secondary Threshold of £8,840 (for the 2021/22 tax year).

Paying yourself a salary up to the NIC Primary Threshold of £9,568, will allow you to avoid paying Income Tax and NIC. Even though this amount it low, you’ll still qualify for the State Pension and any benefit entitlements, as your earnings will be above £6,240 pa (the Lower Earnings limit).

You could also pay yourself a salary up to the tax-free Personal Allowance of £12,570, and you won’t have to pay Income Tax on this amount, but you will be liable to pay 12% NIC on your earnings between the £9,568 and £12,570. You could then take the remainder of your income as a dividend, with the first £2,000 being tax-free.

Dividends

A shareholder of their Limited Company is able to take profit from the company in the form of a dividend. You’re only able to do so once there is profit in the company, otherwise the dividend will be classed as an illegal dividend.

The amount you’re able to pay yourself will be related to how many shares you have in your company, for example if you’re the sole shareholder and hold 100% of the shares, you’re able to take all remaining profit once your company’s depreciation costs (ie tax, expenses, etc) have been  accounted for.

All Limited Companies pay 19% Corporation Tax on taxable income. The first £2,000 of annual dividend income is tax free, and you won’t be required to pay NIC or Income Tax either. Any amount over the £2,000 limit will be subject to dividend tax that’s based on your Income Tax band (so you’ll either pay the Basic, Higher or Additional rate tax).

Before you pay your company’s shareholder/s you’ll need to declare the dividends to the board, and make a record of your meeting’s minutes. By keeping minutes you’re providing HMRC with a solid paper trail of amounts issued and dates, should they ever wish to investigate you in the future. You’ll also need to keep a dividend voucher, which also displays details of the payment. Your SG accountant will be able to help you with this.

Director’s Loan

You can also take money from your Limited Company in the form of a Director’s Loan. By doing so you’re able to:

• Lend money back to your company
• Borrow more money from your company than what you originally put in
• Reclaim any money you put into the company originally

You must keep a record of any Director Loans in a Director’s Loan Account, and they must be shown as part of your company’s balance sheet.

Do note that if you take out more money than has been paid into the business, your Director’s Loan Account will be overdrawn and there will be tax implications if this happens. Should your company owe you money, then your loan account will be in credit and you’ll be able to reclaim money without facing any tax liabilities.

For example, if the amount you owe your company is less than £10,000:

• There aren’t any personal tax liabilities, but there may be tax consequences for your company
• If your loan is overdrawn for longer than 9 months and 1 day from your company’s accounting reference date (ARD), then your company must pay Section 455 Tax on the full amount overdrawn
• Your company’s tax return must show any outstanding loan amount
• Section 455 Tax carries a 32.5% tax charge – and your company must pay it alongside its Corporation Tax liability

If the amount you owe your company is more than £10,000:

• The amount you owe must be declared on your Self Assessment Tax Return
• If any interest is generated by the loan you may need to pay Income Tax on that interest
• Your company must deduct Class 1 National Insurance on the loan
• Your company’s tax return must show the loan’s outstanding amount
• Your company must pay Section 455 Tax at 32.5% on the overdrawn amount

If the loan is not repaid / is written off:

• Class 1 National Insurance must be deducted by your company through payroll
• You must pay Class 2 and Class 4 Income Tax on the loan through self-assessment

What you need to keep a record of when it comes to Director’s Loans:

• The amount of money a director gives to the company (excluding any payments for any shares they may take)
• The total amount a director may borrow from the company

These records are usually kept within the Director’s Loan Account. Depending on the amount of money taken, it may be subject to certain types of tax, therefore we strongly advise checking this with your specialist contractor accountant.

If your Director’s Loan Account has zero balance or is in credit

If you take out less from your company than you’ve put in, you’re not borrowing any money, and therefore are reclaiming funds that you’ve already put in.

Therefore the Director’s Loan Account will either show a balance of nil or remain in credit, depending on the total amount you take out. You can take out the available money at any time without any tax implications, so long as your account is in credit.

What happens when your Director’s Loan Account is overdrawn?

If more money is taken out than put in (not including a salary payment, dividend or expense) the withdrawal is a benefit and is classed as a Director’s Loan. This will in effect make your Director’s Loan Account overdrawn.

Your company’s financial year

If your account remains overdrawn 9 months and one day past the end of the accounting period, you will be charged S455 Tax at a rate of 32.5% by HMRC. You will, however, be paid this tax back once you’ve paid the full amount of overdrawn money back to your company.

Expenses

So long as expenses are only for business purposes you’re able to reclaim them. To be able to do so you must complete the correct claims forms and keep a record of the receipts. You’re able to claim tax-deductible expenses in the following form:

• Parking costs and mileage
• Travel and accommodation
• Mobile phone contract costs
• Entertainment
• Food and drink
• Computer and office equipment
• Training costs
• Postage costs

Your company will reimburse you these amounts when you are paid your monthly salary, or at any other point during the month that’s convenient to you. Your company will need to keep receipts of all expenses for a minimum of six years along with a record of what the expense was and what it was required for.

Each tax year you’ll need to complete a P11D whereby you’ll declare the benefits for that tax year.

 How SG Accounting can help

Tax can be confusing, especially when it comes to working out your % margins, what tax is due when, and how much you could up paying extra if you get it wrong. That’s where we come in, our expert accountants here at SG help Limited Company contractors just like yourself everyday with their tax and accounts. Don’t be left out of pocket by getting it wrong, speak to our team today to find out how we can help you become a success whilst also keeping the taxman happy.