4 Legal Ways to Take Money Out of a Limited Company

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4 Legal Ways to Take Money Out of a Limited Company

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Many small business owners tend to think that they are absolutely free to take money out of a limited company’s profits. After all, the company is yours and need not to answer to anybody. Whatever the firm owns belongs to you, and you can use it whenever and wherever you feel like. If you fall into this category of startup owners, you will soon find yourself in serious troubles.

A limited company is a separate legal entity from the owners. It has its rights and obligations. Unlike in sole proprietorship, once you register your business as a limited company with the Companies House, its assets, profits, and liabilities are never yours. They belong to the firm. It, therefore, means that you cannot freely dip your hands in and out of company profits or asset-base.

If you own a limited company, there are four ways through which you can legally take money out of the business’ bank account. However, you must follow specific procedures. Also, either of these is only considered legal if you don’t take more than the company’s net profit.

  • A Director’s Salary

Like the rest of the staff team, directors are essentially considered to be company employees. While you may be a shareholder in the business, you can choose to pay yourself a monthly salary. However, you will have to register for Self-Assessment. Further, the company must register with HM Revenue and Customs as an employer. From the amount you receive from the business in the form of salary, the firm must deduct National Insurance Contributions and income tax and remit it to HMRC on a regular basis.

You can choose to avoid personal tax liability but still qualify pension and other benefits by paying yourself the amount that is below taxable income but within the NIC primary threshold. If you are also a shareholder in the company, you can as well take additional income in the form of dividends.

  • Director’s Loans

If you need more money on top of salary and dividends, you can take money out of the company’s bank account in the form of director’s loan. However, you must ensure that the process is handled correctly. It must be recorded and accounted for in the director’s account. It is a perfect option when your director’s account is in credit. Ideally, having a director’s account is a smart way to run a company. It is not only a tax-efficient method of borrowing money from the business but also allows you lend your business when there is a need.  

  • Dividends

Dividends are typically paid to shareholders out of net profit. The company has to deduct costs, tax, and expenses before paying dividends. In fact, it is illegal to pay dividends when the business has made no profits. If you choose to take money from the company in the form of dividends, you are subject to income tax. When not monitored carefully, dividends can be a tax burden to the business.

  • Company Expenses

Another way to take money from a limited company is by reclaiming business expenses that you facilitated from your pocket. These may include mileage, training fees, business travel, and office equipment. To do so, you must provide receipts and fill claim forms. In addition, the company must record such payments in the expense account and keep the receipts for a minimum of six years.

Are you planning to borrow money from your limited company but doesn’t understand the tax obligations that come with it? Let us help you. At weaccountax, we have all it takes to guide you through various business decisions, including business registration, Paye registration threshold, and accounting services. Give us a call now and have all your concerns addressed.

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