How Do I Legally Take Money Out Of A Limited Company?
When you set up a limited company, you are creating a separate legal entity from yourself. This means that the business is its own person (or people), and as far as the law is concerned, a limited company has its own identity and its own legal rights.
When it comes to finances, the limited company is responsible for all of its own business debts and liabilities, meaning you are not personally liable. However, this means you can’t just simply write yourself a check or withdraw money like it’s your own personal bank account…
You may be thinking: “But if I’m the sole owner and employee of my limited company, how do I get paid?”
Simply put, you don’t pay yourself, your company pays you. When you are ready to take money out of your limited company, there are necessary steps to take to make sure your transactions are in compliance with the law. That’s why we’ve created this simple guide to help you learn how to legally take money out of a limited company.
Joanna Bookkeeping is an Oxford-based accounting and bookkeeping practice that provides customised services to businesses across the UK. If you’re looking for an accountant or bookkeeper who can guide you through the logistics and legalities of your business, and answer all of your limited-company-related questions, look no further than Joanna Bookkeeping.
There are three ways in which money can legally be taken out of a limited company.
1. Salary
One of the most common ways to withdraw money from a limited company is for directors to pay themselves a salary. It’s important that you ensure you’re an employee of your company and that your salary is paid via PAYE. You’ll also have to pay National Insurance Contributions (NIC) on your earnings.
It’s important to note that not all directors wish to take a big salary, some prefer a smaller salary and take a larger portion of their pay in dividends instead.
If you make personal use of something that belongs to the business–like a company car or a laptop, you’ll have to report it as a benefit and pay any tax due.
2. Dividends
Dividends are payments that a limited company can make directly to its shareholders only if it has made a profit and it’s another way of taking money out of a limited company legally.
In order to pay dividends, you must first hold a directors’ meeting to declare the dividends, ensuring minutes of the meeting are recorded, even if you’re the only director receiving dividends.
When your company makes dividend payments, you must create a dividend voucher that includes the following information:
- Date
- Company Name
- Names of the Shareholders who are Receiving the Dividend
- Dividend Amount
*All dividend recipients must obtain a copy of the voucher, and the company must record a copy.
You won’t pay tax on dividends that fall within your dividend allowance, which is the amount of tax-free income you’re allowed to earn each year. Therefore, you’ll only pay tax on the amount above the dividend allowance.
3. Director's Loan
When you borrow money from your company, it’s called a director’s loan. It’s not considered salary (you don’t have to pay tax on it) or dividends (it is not profit, so you don’t have to pay corporation tax). No taxes…sounds great, right? But that doesn’t mean you get to keep the money forever. You will eventually have to repay the loan. A directors loan can be made with or without interest, and it would be up to the limited company to decide the interest rate it charges on a director’s loan.
Director’s loans can be a great way to legally take money out of your limited company, but they’re not without their problems. In order to avoid the pitfalls of director’s loans, you should have a solid bookkeeping and accounting strategy.
It should go without saying that you shouldn’t take out a loan just because it’s easy, you have to have a plan for how to pay it back.
We know that there’s a lot to think about when you’re running a limited company, that’s why our Oxford-based expert accountants make it their job to help you stay on top of your legal obligations. And If you’re not based in Oxford, no worries, we’re fully digital and offer our services to businesses all over the UK!
Let’s chat about your accounting needs.
We look forward to hearing from you.
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