There are a few ways to take money out of a limited company, which all have different tax implications. I will summarise them all briefly here, but please feel free to get in touch if you want to discuss any of them further.

Loan repayments

If you have loaned money to the company, for example by investing funds to get your business up and running or to cover any tax flow issues, you can generally take this back at any time without tax implications provided the cash is there to do so. As this is a repayment of a loan, it will not need to be reported on your personal tax return.

Loan to director

You can loan money from the company to yourself. I would generally recommend other methods before this one, but it is available to you if absolutely necessary. You would obviously also need to repay the loan back to the company in the future at some point.

HMRC have anti-tax avoidance measures in place to prevent abuse of loans to directors. The practical implication of this is a hefty additional tax charge on the company for any loans to directors that are still outstanding when the corporation tax bill is due (9 months and a day after your yearend). This additional tax charge can be reclaimed by the company, but it isn’t a straightforward process and it can take a significant time before it can be reclaimed. For these two reasons, I recommend avoiding loaning money from the company to directors wherever possible.

Dividends

As long as the company is profitable then you can take money out as dividends. Dividends are a distribution of the profits of a company to its shareholders.

Important things to note about this are that when dividends are paid, the amount needs to be equal to all shareholders based on their shareholdings. For example, if one director had 70% of the shares and another had 30%, and a total dividend of £1,000 was declared then the first director would receive £700, and the second would receive £300.

Another important thing to note is that in order to be able to take dividends, the company needs to have distributable profits. This doesn’t necessarily mean that a company must make a profit in the current year – the company needs to effectively be profitable on a cumulative basis. A company that makes several years of profits but then has a loss-making year could still declare dividends as long as in total all of the profits less the loss are higher than the amount of dividends already distributed.

You should make a formal note in the company’s minute book of any dividends that are declared and prepare a dividend voucher – this can often be done using accounting software.

Everyone gets a dividend allowance of £2,000 each financial year, which means that they can receive this amount tax-free. I would always recommend using this allowance if possible.

Dividends need to be included on your personal tax returns so that any tax due can be calculated. 

In practice, many companies will use a director’s loan account during the year to take payments out and then declare a final dividend at the end of the year which will effectively convert the loan into dividends. This has the benefit of not having to prepare the dividend voucher on a monthly basis.

Payroll

You can set up a payroll for the company to pay staff, including yourself and any other directors. This comes with slightly more costs in terms of the processing but can offer tax advantages – although this is generally when you don’t have any other source of income. The company can deduct your salary prior to calculating the profits that will get tax, which is one of the reasons it is beneficial to you.

For you personally, your salary will be taxed as if you are an employee of any company. Depending on the salary you will pay income tax and national insurance. You will need to report this on your personal tax return using the information on the P60 that your company or payroll provider produces for you.