How to Legally Take Money Out of Your Limited Company?

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a blog featured with annete entitled How to Legally Take Money Out of Your Limited Company?

It is so easy to think that, just because you have your own business, you can have access to your business’s money anytime you want and need to. One of the most common concerns small business owners have is how they can take out money from the business since they practically own and run the company.

The truth is, when you own a limited company, the HM Revenue & Customs (HMRC) sees your business as a separate legal entity from you as the owner, unlike when you are a sole trader. This means that all of your business’s finances and assets belong to the company and not to you as the director or the business owner.

 

You can also read about – All the Things You Need to Know About Registering Your Own Solo Business with the HMRC

 

As a result, you can’t simply withdraw money from your own business in the same way a sole trader does. All your withdrawals and all transactions of taking out money from the company for anything other than the business’s use is called “drawings”. As with all things financial, all drawings should be recorded correctly in the balance sheet.

Now we can ask the question:

How can business owners draw out their money from their company legally when you are a limited company?

 

You can choose one of the three ways:

Director’s Salary

This is the most common way directors take out money from the limited company: by paying themselves a salary. 

Technically, a limited company director is considered as an employee of the business just like anyone else, so they will have to be registered with the HMRC for PAYE. You will also have to pay the National Insurance Contributions (NIC) on your own earnings, which will go to your state pension and benefits. The HMRC must also be sent monthly submissions to confirm your salary information.

Taking out money from your company through a salary is beneficial since it is a tax-deductible expense. This means it will reduce the year-end corporation tax liability of your business. For you, as a business owner, you can also ensure that you take income from your business whether the business is going well or is challenged. 

Dividend Payments

When your limited company is already generating profit, the business will need to pay a certain percentage as corporation tax. Whatever is left of this can be used to pay the directors or the shareholders in the form of dividend payments.

Dividends are a way to divide the company’s profit and distribute this among the directors and shareholders as a percentage, depending on the proportion of their ownership. Most directors choose to draw money out of their companies through dividend payments compared to paying themselves a salary because dividend payments are more tax efficient.

Limited companies usually issue dividend payments at the end of a financial year. However, there are also cases when the limited company issues dividend payments at certain points throughout the year, especially when its directors or shareholders rely on the dividends for their income.

When you draw out money from the company using this method, the director must declare dividends and a payment date, which are settled and agreed upon during a board meeting. After this, the shareholders should be given a dividend certificate. This way of payment should be followed and recorded properly even if the company only has one director.

Director’s Loan

Another way to take out money from your limited company is through a director’s loan. However, this should be handled and processed correctly, or else you may be in danger of facing the consequences and risks. 

When a director takes out money from a company that is not in the form of a salary or a dividend payment, you will have money that is considered a director’s loan because your company is a different legal entity from its owner. This is why it must record this type of transaction in a director’s loan account, which keeps track of the running balance of transactions between a director and the company.

If the director has paid more into the company than he has taken out, the director’s loan account is said to be “in credit”. However, when the director has withdrawn more money than he has paid to the business, the director’s loan account is said to be “overdrawn”.

An overdrawn director’s loan account is a common problem among insolvent companies, but in businesses that are managed and are growing well, the director’s loan is repaid in full or may also be written off by the company correctly and legally. In order to avoid any problem, it is advised that you immediately repay the money you took out from the business as soon as you are able.

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

 

What should I do if I accidentally use my business’s money to pay for personal expenses?

This can happen even to the best of us, but there is no need to worry. Your expense will go to the director’s loan account during an occasion like this since they are not official drawings. This also means that you’ve borrowed money from your company, which you can repay before the year ends.

 

Is there a way to take out money from my own limited company without paying tax?

Sadly, the answer is that there is no way you can avoid tax when you are taking out money from your business’s bank account. This is why it is advised that you are careful to only take money out of the company when it is making a profit and once all of its financial liabilities have been accounted for. 

However, you still have a choice whether you’re going to use more efficient or less efficient tax methods, like combining the methods mentioned above. If you’re in doubt about which method (or methods) to choose and is right for your business, it is always best to consult with your company’s accountant to get the best and safest financial advice.

And if you want more practical business ideas such as this one, make sure you go around our website, and connect with us on social media. We are on FacebookInstagramiTunes and Youtube. See you there! 

Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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