Taking money out of your Limited Company

There are three ways in which money can be taken out of a limited company:

Directors who only take a small salary would usually take the majority of the money in dividends. Dividends can be taken as long as your company has the reserves to do so (note – reserves are different to profits).

Corporation tax is deducted first, before dividends are paid.

Everyone has a dividend allowance of £2,000 per annum (£1,000 from April 2023), and then dividends are taxed at 8.75%/33.75%/39.35% depending on your tax band.

Taking money from a limited company that is not in the form of a salary or dividend is known as a director's loan. This must be recorded in a directors' loan account, which keeps a running balance of any transactions between the director and the company.

The account balance can be ‘in credit’, if the director has paid more into the company than taken out, or ‘overdrawn’, if the director withdraws more than they have paid in.

All transactions in the director’s loan account will need to be accounted for in the company’s balance sheet, as well as included in the company tax return and director’s self-assessment return.

The director's loan account can be overdrawn by up to £10,000. If the account is overdrawn by more than £10,000 at any point in the tax year, it must be declared on a P11D and tax paid on the benefit.

Overdrawn directors loan accounts also attract an additional tax, payable by the company, of 33.75%, if these are not repaid within 9 months and 1 day of the accounting period end date.

This tends to be the most obvious method; directors pay themselves a salary. As well as this, expenses and bonus payments can be taken out. Directors must ensure they are employed as an employee of their company and their salary is paid via PAYE. Not all directors will take a large salary – some prefer a smaller salary and taking a larger share of their pay in dividends instead.

If an employee makes personal use of a company asset, such as property or a car, this should be reported as a benefit in kind, with any tax paid. All company directors have to prepare a tax return under Self-Assessment rules.

A salary up to the NI secondary threshold of £9,100 can be taken out tax free, with no employee or employer contributions. So, no income tax or NIC needs paying but eligibility for the state pension will remain.

Alternatively, a salary equivalent to the personal allowance level of £12,570 can be taken. No income tax needs paying, however a small employers National Insurance contribution will be payable between £9,100 and £12,570 at 13.8%.

Additional employees on payroll

If you have additional employees or more than 1 Director employed in your limited company, you can claim the Employment Allowance of £5,000 per annum to cover employer national insurance contributions, so directors could take salaries of £12,570 with no income or NI tax payable.