5 May 2024
Expert Verified
If you own a limited company, you might think you can withdraw money from its profits anytime. Unfortunately, it's not as simple as extracting cash from your personal bank account. The company is a separate legal entity from its shareholders and directors. This means the assets and profit belong to the company, not the shareholder or director.
So, as the company director, how can you withdraw money from a limited company?
There are three main ways to take money out of a limited company:
You can use any combination of these methods to extract cash from your company. The most tax-efficient combination depends on your circumstances and is best discussed with your personal accountant or tax advisor. If you prefer to determine the best combination yourself, it’s essential to understand the following tax definitions, which we've detailed at the bottom of this article:
If you're unfamiliar with these definitions, scroll to the bottom of this article for an explanation. We will reference the terms when detailing the most tax-efficient combination of extracting money from a limited company.
If you choose to pay yourself a salary, you'll need to register with HMRC for PAYE and pay National Insurance Contributions on your salary—the same way you would pay any employee.
One of the main benefits of extracting cash from the company via a salary is that it counts as an allowable expense, which lowers your profits and, therefore, your Corporation Tax. In addition, if you get paid at least the Lower Earnings Limit, you accrue qualifying years towards your state pension. You will also be eligible for maternity benefits, and on higher salaries, it will be easier to qualify for personal loans, mortgages, and certain insurance policies.
The question remains, though, whether you should take a high or low salary.
If your goal is to minimise taxes and national insurance contributions, then you want to:
As a result, most company directors opt for a salary up to the National Insurance Contributions threshold of £9,100 to qualify for state pension and benefits without incurring a personal tax liability.
However, there are scenarios in which it is favourable to take a higher salary, such as:
Again, everyone’s scenario is different, and it’s best to discuss your personal context with an accountant or tax advisor to help you determine the best salary for each tax year.
If your company has generated profits after paying all expenses, taxes, and other liabilities, it can distribute a portion of these earnings to shareholders. This distribution is known as a dividend.
You don't pay taxes on any dividend within your Personal Allowance. Additionally, you are entitled to a dividend allowance every year. You will only have to pay taxes on any dividend income that exceeds this allowance. The dividend allowance for the 2024/25 tax year is £500. When calculating the tax on dividends, the tax you pay over the tax-free allowance depends on your Income Tax band.
Therefore, to extract cash from the business tax-efficiently, for example, you could pay yourself £50,270 via a combination of salary and dividends to end up with a tax bill of £3,255. The way this would work is to:
If you compare this to taking no dividends and rather paying yourself £50,270 via salary, then the following steps need to be considered:
As a result, the total taxes and national insurance contributions due on a salary are £16,237.46 versus £3,255 on a combination of salary and dividends. However, this doesn’t incorporate the change in corporation taxes. A higher salary lowers your corporation tax bill because salaries are an expense, and dividends are not.
Assuming a simplified scenario in which you have to pay the main rate (companies with profits over £250,000) of 25% corporation tax, in scenario one, you lowered the corporation tax bill by £9,100 25% = £2,275. In scenario two, you lowered the corporation tax bill by £50,270 25% = £12,567.50. So, where we saw that the impact on your personal tax bill was initially the difference between £16,237 and £3,255 when including the impact on corporation tax, the difference shrunk back to £2,689.96. Therefore, running your numbers by an accountant or tax advisor is always recommended for finding a tax-efficient solution.
The third option to extract cash from the company is via a director’s loan. This loan is taken by a company's director or other close family members and is not a salary, dividend, or expense repayment. It is important to understand that the loan has to be paid back to the company and that any money borrowed or paid into the company should be recorded, usually known as a 'director's loan account'.
Depending on whether the account is overdrawn or in credit, you might have to pay tax on a director's loan. If your director's loan account is overdrawn, you owe money to the company. In that case, you have nine months after the end of the accounting period to repay the loan. If you fail to do so, the company will be subjected to a corporation tax penalty of 33.75% of the outstanding loan value.
If the amount involved is more than £10,000 and the loan is either interest-free or charged at a rate lower than the official interest rate, the loan has to be treated as a benefit in kind. Therefore, Class 1 national insurance contributions must be paid by you as the employee and the company. Class 1 national insurance contributions must be paid on the difference if the interest is below the official interest rate.
If the loan is “written off” and not paid, the company treats it as a benefit in kind. Therefore, the company pays Class 1 national insurance, and you would need to pay income tax through the self-assessment tax return. HMRC will also charge the company interest on the corporation tax until the Corporation Tax is paid or the loan is repaid. You can reclaim the Corporation Tax—but not the interest.
Considering the three options, as a limited company director, it is usually the most tax-efficient way to pay yourself a combination of salary and dividends. For the 2024/25 tax year, this means taking a salary up to the Secondary National Insurance Threshold of £9,100 a year (£758 a month). Any further payouts should be made via dividends as the personal tax rates are higher than the dividend tax rates. Note that using dividends instead of a salary increases taxable profits and your corporation tax. There might also be other personal circumstances that would favour taking a higher salary, such as wanting to apply for a mortgage. Thus, it's best to discuss your scenario with an accountant or tax advisor.
The following definitions are important to understand to determine the best tax-efficient way of extracting cash from a limited company as a director.
The standard Personal Allowance in the UK is £12,570. This means you don't have to pay tax on this income. However, your Personal Allowance may be larger if you receive Marriage Allowance or Blind Person's Allowance. On the other hand, if your income exceeds £100,000, your Personal Allowance will be reduced. The allowance goes down by £1 for every £2 where your adjusted net income is above £100,000 – meaning that you will have no allowance left if your income is £125,140 or above.
For the 2024/25 tax year, there are four income tax rates and bands. Do note that these are different if you live in Scotland.
• Personal Allowance: Up to £12,570 (0% tax rate)
• Basic Rate: £12,571 to £50,270 (20% tax rate)
• Higher Rate: £50,271 to £125,140 (40% tax rate)
• Additional Rate: Over £125,140 (45% tax rate)
You don't pay taxes on any dividend within your Personal Allowance. Additionally, you are entitled to a dividend allowance every year. You will only have to pay taxes on any dividend income that exceeds this allowance. For the 2024/25 tax, the dividend allowance is £500.
When calculating the tax on dividends, the tax you pay over the tax-free allowance depends on your Income Tax band.
• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%
The National Insurance thresholds determine the contributions due on employees' earnings. Your payroll software will calculate and deduct these contributions every time you pay yourself or your employees.
There are four national insurance thresholds to be aware of when you consider to take a salary:
• The Lower Earnings Limit: No Class 1 contributions are due on earnings below £6,396 per year (£533 per month or £123 per week); therefore, no qualifying years towards the pension are accrued.
• The Secondary Threshold: When you are paid more than £9,100 a year (£758 a month or £175 a week), the employer will have to pay 13.8% employer's Class 1 national insurance contribution.
• The Primary Threshold: When you are paid more than £12,570 a year (£1,048 a month or £242 a week), 8% employee’s Class 1 contributions start to be deducted from your earnings. As a side note, the 8% applies to employees in the National Insurance category A, which most employees fall under.
The Employment Allowance reduces your annual National Insurance liability by up to £5,000. You will pay less employers' Class 1 National Insurance each time you run your payroll until either the £5,000 threshold is reached or the tax year ends, whichever comes first. You can claim the Employment Allowance if your business had less than £100,000 in Class 1 National Insurance liabilities in the previous tax year.
