How-to-take-money-out-of-a-limited-company

What is the best way to extract funds from a business?

Many company directors grasp the significance of maintaining a distinction between their personal and business finances. However, when the need arises to withdraw money from the company, various options are available. While it may not be deemed ideal, you can withdraw money from a limited company at your discretion, provided it is done correctly.

 

Director’s salary and expenses

As employees of the business, it’s logical for company directors to receive a salary, and akin to other employees, they are obligated to pay income tax and National Insurance contributions (NICs) on their earnings.

Typically, most company directors draw a modest salary from the business, usually up to the National Insurance contributions primary threshold of £12,570 a year (2022/23). This ensures they avoid income tax and NICs but surpass the lower earnings limit of £6,396, making them eligible for benefit entitlements and the state pension.

Additionally, you can claim reimbursement for business expenses paid from your own funds. Keeping receipts, completing claim forms, and incorporating the expenses in your self-assessment tax return prevents taxation on this amount. Reimbursement can be processed when you receive your salary or at another convenient time.

 

Dividends

Dividends serve as a means to distribute a limited company’s profits among its directors or shareholders, presenting a tax-efficient method of extracting earnings. These dividends are disbursed from the profits retained in the company after the deduction of corporation tax. 

The initial £2,000 of dividend income each year incurs no tax. Beyond this threshold, dividend tax rates are 8.75% at the basic level, 33.75% at the higher rate, and 39.35% at the additional rate.

While it’s common for limited companies to declare dividends at the fiscal year-end, they can also be issued at various intervals throughout the year. Declaring dividend payments and establishing a payment date require approval at a board meeting. It is crucial to note that dividends can only be distributed if the company holds sufficient profits; failure to meet this criterion may categorise them as unlawful dividends, potentially necessitating repayment to the company.

 

Director’s loan

An alternative method to withdraw funds from a limited company is through a director’s loan, which can be a tax-efficient approach if managed correctly. This loan allows you to borrow money from the company or lend personal funds to the business.

If the borrowed amount exceeds what you’ve previously contributed, creating an ‘overdrawn’ director’s loan account, should be documented and reflected on your balance sheet. When the director’s loan is overdrawn by less than £10,000, there are no personal tax obligations. However, if the loan is not repaid within nine months and one day from the company’s accounting reference date, the company may incur Section 455 tax at 33.75%.

For director’s loan accounts exceeding £10,000, the loan must be disclosed on your self-assessment tax return, and corresponding tax payments are required. Additionally, the company is subject to Section 455 tax on the overdrawn amount.

 

What if I want to close the company and take money out?

If the company can settle all its debts before closing, a procedure known as Members’ Voluntary Liquidation (MVL) can be employed to cease operations and distribute funds among shareholders. In this scenario, the funds distributed to shareholders are considered a capital distribution, attracting a favourable tax rate.

This method proves highly effective for winding down a business that has reached the end of its operational cycle. It enables directors to methodically conclude the business’s affairs and extract value in a tax-efficient manner.

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Need help?

For queries regarding Members’ Voluntary Liquidations or concerns about an overdrawn director’s loan account, please reach out to us for a complimentary phone consultation. With an expansive network of over 100 offices, we provide confidential director support across the UK.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.