When you are running a limited company, especially if you have incorporated from a sole trader or partnership, you must ensure you are familiar with the ways in which you can withdraw money as a director – if not, it is easy to incur unnecessary tax liabilities for either the company or directors.
As a director of a limited company you can take money from the company in three ways:
1. Salary, expenses and benefits
If you want to take salary, expenses or benefits from the company you must register the company as an employer with HM Revenue & Customs (HMRC). The company must deduct income tax and national insurance contributions, and pay this to HMRC together with any employer national insurance contributions.
Dividends are paid out of business profits after corporation tax has been deducted. It is illegal to take out more dividends than the total amount of available profits from current and previous financial periods.
You must usually pay dividends to all shareholders. Basic rate tax payers need pay no further tax on the dividend once received.
You must hold a meeting to ‘declare’ the dividend and keep minutes of the meeting, even if you are the only director. You must also produce a dividend voucher for each shareholder detailing – date, company name, name of shareholder, amount of the dividend to be paid, and the dividend tax credit (this is calculated as: dividend divided by 9). You must give a copy of the dividend voucher to the shareholder and keep a copy for the company records.
3. Directors’ Loans
If you take more money out of the company than you put in, and it isn’t salary or dividend, it is called a directors’ loan.
If the company makes loans to directors it must keep detailed records of these transactions – there are detailed tax rules about how directors’ loans are handled.
Tracy Newman can advise on running a limited company.