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How to take money out of a limited company

Profile picture of John Carpenter.

Chief of Staff

Last Updated: | 9 min read
Last updated: 11 Apr 2024

Limited companies are individual legal entities, which means that business finances and assets belong to the company, not the owners of the business. As a result, you must follow specific procedures to take money out of a limited company. Below, we explain the different ways that you can do this.

When running a limited company, you cannot simply withdraw funds from your business bank account whenever you want. You must record all income received by the company and all money paid out by the company. You also need to factor in business taxes to determine how much profit is available to withdraw at any given time.

Four ways to take money out of a limited company

The four ways that you can legally take money out of a limited company are:

  • as a director’s salary
  • as dividend payments
  • as a director’s loan
  • by claiming allowable expenses

By extracting profits using a combination of these methods, a limited company can be an extremely tax-efficient way to run a business and minimise personal tax and National Insurance liabilities. This is because a company’s taxable income (profits less costs and overheads) is subject to Corporation Tax, as opposed to the higher rates of Income Tax payable by sole traders.

The Income Tax rates for the 2024/54 tax year are:

  • 20% (basic rate) on taxable income above £12,570 (tax-free Personal Allowance) up to £50,270
  • 40% (higher rate) on taxable income between £50,271 and £125,140
  • 45% (additional rate) on taxable income above £125,140

Director’s salary

Company directors, many of whom are also shareholders, usually receive salary payments from their companies. A director is essentially an employee for tax purposes, so the company must register with HMRC for PAYE and pay employer’s National Insurance contributions (NIC).

The company is also required to deduct Income Tax and employee Class 1 NIC from the director’s salary. and then send this money to HMRC on a monthly or quarterly basis.

Salaries and wages are tax-deductible expenses, so they are paid before Corporation Tax is applied. This means that companies do not pay any tax on this money. As a company director and shareholder, you can pay yourself in a tax-efficient manner by:

  • taking a small salary up to the NIC primary threshold
  • topping up your salary earnings with dividends from shares

The NIC primary threshold is currently £1,048/month (£12,570/year), which is the same as the Personal Allowance.

If you use this strategy to take money out of a limited company, you won’t incur any personal tax liability on your salary but you’ll still qualify for State Pension and benefits entitlements. Furthermore, you will pay dividend tax on your dividends, which has lower rates than Income Tax.

Dividends

Dividends are sums of money paid to shareholders out of company profits after the deduction of Corporation Tax. Most directors are also shareholders, which means they can take money out of a limited company in the form of dividends.

There is no tax liability on dividends up to £500 per year. Above that amount, the following dividend tax rates apply:

  • Personal Allowance: 0% up to £12,570 annual income
  • Basic rate: 8.75% up to £50,270 annual income
  • Higher rate: 33.75% between £50,271 -£125,140 annual income
  • Additional rate: 39.35% above £125,140 annual income

Sole traders would pay more Income Tax and National Insurance on the same amount of taxable annual income.

Dividend income is taken into account for Income Tax band purposes. When an individual’s annual income exceeds the basic rate threshold, dividend payments are liable to higher and/or additional dividend tax rates, so it is important to be wary of the pitfalls of higher tax rates.

Illegal dividends

Dividends are only available if a company has retained profit after the deduction of all costs, expenses, and business taxes for the current financial year, and after taking into account any retained profits and losses from previous financial years.

If there is no profit remaining after these considerations, dividends cannot be paid. If any dividend payments are made, they would be deemed illegal and could result in an HMRC investigation and penalties.

Dividend Tax Calculator

How to issue dividends

Limited companies can issue interim dividends on a regular basis throughout the year, or they can issue final dividends at the end of the financial year. Most small companies issue interim dividends because the owners tend to rely on this regular income.

To issue dividends, directors must ‘declare’ them at a board meeting and agree on a payment date. Dividend vouchers (or dividend ‘counterfoils’) should then be issued to shareholders, usually, on the date the payments are declared

A dividend voucher is essentially just a piece of paper (or an electronic document) that provides the following details:

  • company name and registration number
  • date the dividend was issued
  • shareholder’s name and address
  • payment amount
  • number and class of shares on which the dividend payment is being issued
  • director’s signature

Minutes of the board meeting must be taken, even if a company has only one director. Copies of minutes should be kept at the registered office or SAIL address.

Director’s loans and director’s loan accounts

A director’s loan is another tax-efficient way to take money out of a limited company. The purpose of a director’s loan is to allow a director to borrow money from a company, or a company to borrow money from a director. These transactions must be recorded in a director’s loan account, which can be in the form of a bank account or bookkeeping entry.

A loan account will record a running balance of all money paid to the company by a director or removed from a company by a director. Account balances will show as ‘in credit’, ‘nil’ or ‘overdrawn’, in much the same way as a personal current account with an overdraft facility.

Example:

  • A director borrows money from a company that exceeds the amount they have given to the company. The loan account will be ‘overdrawn’ until the loan is repaid in full or written off by the company
  • A company borrows money from a director. The loan account will be ‘in credit’ until the director reclaims the money they gave to the company
  • If no money is owed by a director to the company or by the company to a director, the loan account will have a balance of ‘nil’

There may also be tax implications for a director and a company, depending on the overdrawn balance and the period of time the loan account is overdrawn. If a company owes money to a director, the director can remove this sum from the loan account at any time without facing any tax liabilities.

Tax on director’s loans

All transactions in a directors’ loan account must be accounted for in the company’s balance sheet. These transactions may also have to be included in the Company Tax Return and the director’s Self Assessment tax return. Tax liabilities for overdrawn loan accounts depend on the amount of money a director owes to the company or vice versa, and the length of time the loan account has been overdrawn.

In most cases, there will be no tax implications for a director if an overdrawn loan account of £10,000 or less is repaid within 9 months and 1 day from the end of the company’s accounting reference date (ARD). If the overdrawn loan is not repaid within that time, the company may have to pay 33.75% of the outstanding amount as Corporation Tax.

If a director owes a company more than £10,000, this sum must be declared on their Self Assessment tax return. The official rate of interest (2.25%) may be applied. Companies and directors may also charge interest on any sum of money owed to them.

A loan from a company to a director is classed as a ‘benefit in kind’. This means that Class 1 National Insurance must be deducted through payroll. If a company writes off a director’s loan, it is treated as a form of taxable income, so the director will need to pay Income Tax on the loan through Self Assessment.

When a director lends money to a company, they can charge the company interest on the loan amount. If interest is charged, this will count as a business expense for the company and a form of personal income for the director. The director will need to report this interest as income on their Self Assessment tax return. If no interest is charged by the director, the company will have to report the loan on the Company Tax Return.

Leaving surplus profit in a company

The flexibility of a limited company structure allows you to leave surplus income in the business and withdraw in a future financial year. This is a great option if removing this money would result in higher rates of Income Tax and/or Dividend Tax in the current financial year. There is no such tax-planning strategy available to sole traders.

What tax do company directors pay?

Company directors pay Income Tax and National Insurance contributions on their total annual income. These deductions are paid directly to HMRC through PAYE (and Self Assessment if the director receives income other than a salary). The company collects Income Tax and Class 1 NIC on a director’s salary through payroll and sends it to HMRC, along with the company’s employer’s National Insurance contributions.

If a director receives part of their income as dividends, no National Insurance is payable on that income. This results in a saving for both the director and the company. If a director is a higher-rate taxpayer, they may have to pay a higher rate of tax on any dividends they receive.

Self Assessment for company directors

Directors must register for Self Assessment and report all sources of taxed and untaxed income on a Self Assessment tax return each year. If a director owes more tax than the company has collected through payroll (e.g. from dividend payments and benefits received), the director must pay the additional tax through Self Assessment.

Reporting an overdrawn director’s loan through Self Assessment

There are certain tax implications for directors and limited companies when a loan account remains overdrawn or in credit for a certain period of time. Interest rates are applied in some circumstances.

Companies may be required to include details of directors’ loans in their Company Tax Returns and paying tax under Section 455 of the Corporation Tax Act 2010.

Directors may have to include details of these loans on their Self Assessment tax return. They will also need to pay Income Tax on any loans that have been written off, or on interest, they received from the company.

When to report a director’s loan on your Self Assessment tax return

Directors must report loans on their Self Assessment tax returns in the following circumstances:

  • The director owes the company more than £10,000 at any time during the year
  • The director pays the company interest on a loan below the official rate of interest
  • The director is not required to repay the loan because it is ‘written off’ or ‘released’ by the company
  • The director charges the company interest on a loan, which is classed as a form of personal income

There are a number of circumstances when a director’s loan and interest payments are viewed by HMRC as forms of taxable income. Therefore, directors will be liable to pay Income Tax and National Insurance Contributions on these loans or payments.

We strongly advise consulting an accountant or tax advisor to assist with matters relating to director’s loans and Self Assessment tax returns, particularly if you have no prior experience with such matters. An accountant can also provide tailored advice and guidance on the most tax-efficient way to take money out of a limited company.

About The Author

Profile picture of John Carpenter.

John is Chief of Staff at 1st Formations and statutory director of the BSQ Group, responsible for assisting the CEO, HR, recruitment and content proofreading. He has an MSc in Digital Marketing Leadership from the University of Aberdeen and certificates in Anti Money Laundering, and Company Secretarial Practice and Share Registration Practice. John was previously operations director at a Mayfair-based law firm.

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Comments (18)

Kylie Taylor

April 2, 2020 at 10:12 pm

Can someone simply explain what director salary are in administrative expenses please ?

    John Carpenter

    April 3, 2020 at 8:38 am

    Thank you for your question, Kylie.

    Director’s salary is the salary that a director or directors take from the business through PAYE. A director’s salary is an allowable expense – it allows a company to reduce its profit to reduce its Corporation Tax bill. Some directors choose to pay a tax efficient salary up to the National Insurance contributions threshold, to receive as much money without being taxed as possible. The current National Insurance contributions threshold is £9,500.

    I hope this information is of use to you.

    Kind regards,
    John

    Dave

    June 10, 2020 at 6:57 pm

    I’m a non UK resident with a UK company where I serve as a director. When I pay myself a salary, do I pay any taxes on it in the UK?

      John Carpenter

      June 11, 2020 at 9:52 am

      Dear Dave,

      Thank your for your message. In general, yes – an non-resident serving as a director in the UK and who takes a salary will normally be subject to UK tax through PAYE.

      I trust this information is of use to you.

      Kind regards,
      John

deborah collins

November 20, 2017 at 8:06 am

Last year we Personally Agreed to run a Business with a view to purchasing It within 5 years.
The Major Shareholder drew up a Contract with regards to the rental payment of £3,000 per month for 3 Outlets. He kept control of all Company Bank Accounts.

Within a short period we knew there was something not quite right. We eventually had sight of the Company Bank Account Statements In December 2016, where It became apparent that the major Shareholder was also taking Rents for the 3 Outlets , as well as the £3,000. This has caused major problems with cash flow.

I would like to know If a Major Shareholder can take a Payment from the Company Bank account , that was made Personally and not In the Name of the Business.

    1st Formations

    December 12, 2017 at 9:24 am

    Hi Deborah

    Unfortunately this is a legal issue so we cannot assist with your query.

    Best regards,

raj muraleedharan

February 28, 2017 at 11:42 am

Hi,

I was a sole director of a Ltd company and paid dividends to myself. I have declared the dividend earnings as part of my self assessment and paid all due taxes on my personal income. After this i sold my company before the corporation tax was due to a different person and notified the company’s house regarding the directorship changes .Was there any mistake on my part.

Thanks

Raj

Peter

January 10, 2017 at 11:57 am

Hi
I currently run a small consultancy business. I have not taking any salary or dividend since formation (Sept 16) as I am living off my redundancy payment until 31/3/17. Do I have to take a salary during this period, or does my previous employment qualify me for the minimum NI contributions etc.

Secondly. Can I transfer money from my consultancy Ltd company into a new venture (seperate ltd company) using the revenue from business one. Or do I have to allow for Corporation Tax before any transfer.

Thanks

    1st Formations

    February 9, 2017 at 10:41 am

    Dear Peter
    Thank you for your message.
    Unfortunately we are not able to advise on accountancy and taxation matters are we are not accountants. I would suggest you seek professional advice regarding your position.
    Best regards,
    1st Formations team

Josh

January 1, 2017 at 11:56 pm

If a Director lends a startup company £10,000 or more to be repayable in 5 years, at 0% interest are there any tax implications of doing that ?

This effectively happens when someone begins the process of company formation, website creation stock etc, and unless a third party is lending the money it’s usually the Director putting up the money and taking the risk.
Thoughts or advice?

    1st Formations

    January 5, 2017 at 12:01 pm

    Dear Josh,
    Thank you for your message.
    We are not accountants so unfortunately, cannot advise on matters such as this.
    Kind Regards
    1st Formations Team

Jhj

November 19, 2016 at 11:35 am

My husband takes out 110 per week salary then takes out 1500 monthly as divedend is this OK to do.

    1st Formations

    December 21, 2016 at 5:18 pm

    Dear Jane,
    The amount of dividend which can be taken from a company is based on the level of distributable profits available to pay dividends so as long as the dividends are within that range then in principle there is no issue. I would suggest you contact an accountant to properly consider what would be best for your husband.
    Best regards,
    1st Formations Team

John Joby

September 28, 2016 at 2:09 pm

I work full-time and pay a higher rate of tax on my earning already.

I am looking to take out a directors loan from my own part-time business of £30,000, but pay this back at £5,000 per year from my tax free dividends, so the loan will be paid back after 6 years.

Can anyone explain the tax implications of this on my personal tax and company tax?

    Rachel Craig

    September 29, 2016 at 3:49 pm

    Hi John,

    I’m afraid we’re unable to answer this query – you will need to speak to an accountant or tax advisor.

    Best wishes,

    Rachel

Visitor

November 21, 2015 at 11:12 pm

Quite a useful summary listed on your website. But there is one section which could be expanded to clarify the information provided. The 25 percent tax charge you have stated on the director’s loan in a close company (5 or less shareholders) is known as panelty charge. You have rightly stated that it is payable after 9 months and one day however, hmrc will repay this panelty charge back once the director has repaid the loan or company has written it off. This arrangement is in place to deter shareholders from using the abvious ways of extracting the value from their company without paying tax. Hmrc even pays interest on this payment for the period the panelty charge was held by them. I thought to clarify this point and hopefully this will assist the readers of your website.

Betty Barton

October 9, 2015 at 12:02 pm

if I receive money into the company and then move over to personal account in dividends, expenses and salaries. Am I taxed before it moves as profit at 20 per cent. or is it taxed on personal assessment and how do I use my £10000 personal allowance? My accountant is taking the profit at 20 per cent tax, even though the money has been moved each month and then using the dividends, salary and expenses against my £10,000 personal allowance . Thus giving me no allowance whatsoever. Any advice?

    1st Formations

    October 26, 2015 at 8:01 am

    Hi Betty
    Thanks for your message.
    We are not accountants ourselves so cannot advise on individual matters of accounting/taxation as they affect an individual or company.
    Kind regards