If you are the director of a limited company, one of the most essential things for you to understand is how to pay yourself and your employees. We will go through all of the available options for taking money out of a limited liability business in this section. There are a few various methods that you can do this.
Even if none of the choices are entirely paperless, we hope that the information in this guide will make it simpler for you to select the approach that is most suitable for both your company and your personal circumstances. So, let's get started.
AccoTech is of the opinion that best tax planning should not be confined to the closing of the books; rather, it should be utilised throughout the long period in order to achieve the overall objectives of tax planning. Our tax experts are here to assist you in formulating strategies for a brighter future and carrying those strategies out in an efficient manner so that they can become a reality.
Taking money out of a limited liability business in a variety of different ways
There are primarily four different methods that money can be extracted from a limited corporation. These include:
- Salary
- Expenses paid back,
- Loans to directors and dividends for shareholders
Let's go through each one one at a time, shall we?
Salary
This is one of the simplest ways to pay yourself or another person out of a limited company. You can also use it to pay other people. As with the payment of an employee, all that is required is a straightforward bank transfer from the company account to a personal one.
One of the primary benefits of this arrangement for individuals working for smaller businesses is the potential for receiving a salary that is higher than the personal allowance threshold without being subject to income tax on that amount.
A reimbursement of the costs incurred
If you spend money on something that can be justifiedly classified as being used only for the benefit of your company, you might be able to write it off as a legitimate business expense. For example, equipment, business miles or insurance.
When you submit a claim for a business expense, the firm will pay the money back to you directly in the form of a reimbursement. Additionally, the company may qualify for tax relief for the cost of the expense.
Dividend payments
When compared to other methods of taking money out of a limited liability company, dividends are regarded as having a lower overall tax impact.
Here’s how they work. The company is obligated to pay a certain portion of its income in the form of corporation tax; however, whatever is left after this payment may be distributed as dividends to company directors and shareholders. These payments are determined based on the percentage of the company's shares that the director or shareholder owns at the time of the calculation.
Only once your company has turned a profit will it be permitted to distribute dividends, and it is not allowed to distribute more dividends than it has available profits.
A limited business has the ability to distribute dividends either at the conclusion of the fiscal year or at several intervals spread out throughout the course of the year. When directors rely on dividends as their primary source of income, it can be beneficial to have dividends paid out more frequently.
At official board meetings of the corporation, dividends and payment dates need to be properly agreed upon and "announced." There is paperwork to be completed in the form of dividend vouchers, and a copy of this paperwork will be given to each receiver.
Additionally, it is essential to keep in mind the tax implications of dividends, in particular those that are granted from a country other than your own.
Directors Loans
As part of what is known as a director's loan, a limited company may extend credit to one of its directors for the purpose of financing personal expenses.
You are required to preserve records of any loans made to directors, and all loans must be repaid in full to the company within nine months of the end of the company's financial year1. If you miss this deadline, there is a possibility that you will be subject to an extra tax charge. If the loan is for more than £10,0003, you may also be subject to additional tax duties.
