You’ve decided to set up and trade through a Limited Company. It’s started to make money and that money is sat in the bank account. You now want to get paid.
So, you can just take the money from the bank account, right?
Why can’t I withdraw money from the Limited Company whenever I want?
Okay, so you can. And, lots of people do. But it’s not best practice.
If you have previously been self-employed, you are used to having free reign over the money your business makes.
You can withdraw and pay in money as and when you and the business need it.
The reason for this is because when you complete your tax return, you tell HMRC the profit that you made during the year and it is this figure that you pay your tax and national insurance on.
It doesn’t matter if you only paid yourself £30k during the year; if your business had a profit of £70k, you’ll pay tax on the £70k.
But a Limited Company is different.
A Limited Company is a separate legal entity to yourself. This is why its debts don’t belong to you, and the reason your house is very likely going to be safe should something go wrong.
Now a Limited Company’s profits are taxed just like your self-employment profits would be but instead of it being through your tax return and subject to PAYE and National Insurance, your Limited Company completes its own tax return and pays corporation tax.
So, a Limited Company is a separate legal entity to yourself. It pays tax separately to yourself. And its money should be held in its own Limited Company bank account.
None of this belongs to you. It is not yours to take as and when you want.
What is a Director of a Limited Company and what do they do?
When you first registered your Limited Company, you probably put yourself down as a Director.
A Director’s primary role is to run the Limited Company on behalf of its shareholders.
This means that the Director is typically an employee of the Limited Company. They are not always a shareholder as well – although in most micro businesses they are.
The goal of the Director is to run the Company to ensure that it makes a profit for the shareholder(s).
What is a Shareholder of a Limited Company and what do they do?
A shareholder will own the Limited Company.
If you are the only shareholder, then you will own all the company. But if there are multiple shareholders, they will own the Limited Company in relation to their percentage of shares.
It is for this reason that a Limited Company which is split between spouses can sometimes be 51:49 if one of them has a more active role within the Company and wants to be the controlling party.
The Limited Company, therefore, exists purely to make a profit for the shareholder(s).
How do I take a salary from my Limited Company?
For your role as a Director, you will need to register the Limited Company as an employer and put yourself through the payroll.
If you have income elsewhere, then you may choose not to do this but otherwise I recommend that you do.
The advantage of you taking a salary is that it means you will continue to make National Insurance contributions, which will go towards your state pension and other benefits.
The advantage to your Limited Company of you taking a salary is that it is a tax-deductible expense, so it will reduce the year end corporation tax liability.
You can also pay yourself a salary regardless of the Limited Company’s profits and reserves, so it can be a nice way of ensuring that you take an income from your business.
How do I take dividends from my Limited Company?
You can take dividends from your Company as long as it has the reserves to do so.
You can find the available reserves at the bottom of your balance sheet report, so this is an instance where regular bookkeeping on an accounting software such as Xero can help.
It may be worth noting that reserves are slightly different to your profits. This will become more apparent if your Limited Company made a loss for the first year or two of trading before moving into profits.
Just because you are making a profit this year does not mean that you will have positive reserves available to take dividends, as technically your profits will have to cover the previous years losses first.
The flip side is that if you have had a year or two of profitable trading, but then made a loss. You could still have the reserves to take dividends.
Once you are sure there are the reserves available to take a dividend you can withdraw the money. These are typically round amounts which are taken monthly, quarterly, annually depending on the business.
As well as completing a dividend voucher, you may want to label the bank transfer as a dividend for extra clarity.
What happens if I accidently use my Limited Company to pay for personal things?
There may be occasions when you accidently use the Limited Company card to pay for personal items such as petrol.
As these expenses are not official withdraws, they will go against your Directors Loan Account.
Your Directors Loan Account is where you monitor what money you owe the Company or what the Company owes you.
You can either simply repay the money owed or at the year end, reserves depending, you can take a further dividend to cover this.
If it reaches the point where you owe your Limited Company more than £10k, HMRC will consider this as additional income and tax will be payable until the balance is repaid.
What happens if my Limited Company pays for things that I think are business related, but then my accountant tells me that they are not?
There are occasionally times when you may get your Limited Company to pay for things that you genuinely believe are business expenses, only to be told by your accountant that they are not.
This can be things like health insurance or a car lease.
In these instances, you may choose to add these onto your employment income and at the year end your accountant will create a P11d.
Through the P11d, you will pay tax on these expenses as though they were additional salary.
Could you tell me what salary and dividends I should be taking?
Yes, but as you may not be surprised to hear, not through this blog.
Everyone’s situation is different on both a personal and a business level. So, the general advice that you may hear of taking a nominal salary and then dividends up to the higher rate band may be perfect for you, but it could also be completely wrong.
It would be better to talk to an accountant, whether that is myself or someone else, who can run through your options.