Different Ways of Extracting Money from your Company

As the director of a limited company, you might find that accessing the money you've earned isn’t as simple as just using your company’s funds. A limited company is a distinct legal entity, which means business and personal finances must remain separate. Before you can spend the company’s money for personal use, it has to be extracted in a proper way.

This guide is designed for solo company directors, helping you navigate various methods of extracting funds while considering the tax implications that come with each option. By the end of this article, you'll have a clearer understanding of how to strike the best balance between your personal and business financial needs.

The Different Ways to Access Money from Your Limited Company

Here are the main methods through which you can extract money from your company:

1. Drawing a salary and understanding statutory benefits
2. Paying yourself dividends
3. Receiving benefits-in-kind
4. Contributing to a pension scheme
5. Taking a director’s loan

1. Paying Yourself a Salary: Legal Entitlement and Benefits

As the director of a limited company, you are legally considered an employee. While paying yourself a salary is not mandatory, many directors opt for this method, especially if the company is stable enough to support it.

Any salary you pay yourself must go through a registered PAYE system with HMRC, and you’ll be taxed on it according to the following bands for the 2024/25 tax year:

• Personal tax-free allowance: £12,570
• Basic rate (20%): £12,571 - £50,270
• Higher rate (40%): £50,271 - £125,140
• Additional rate (45%): Over £125,141

Why Paying Yourself a Salary Can Be Advantageous:

• Tax-deductible: Your salary lowers your company’s profits, reducing the amount of corporation tax your company owes.
• Statutory pay: A salary ensures you remain eligible for maternity pay and other statutory benefits.
• Pension contributions: If you earn at least £10,000, you are eligible for automatic pension contributions, which your company can also deduct as a business expense.

Challenges of Taking a Salary:

• National Insurance Contributions: Both you and the company must pay NICs based on your salary.
• Income tax: Salaries are taxed at a higher rate compared to dividends, which can impact the overall tax efficiency.

2. Paying Yourself Dividends: Flexibility and Tax Efficiency

As a shareholder in your company, you’re entitled to dividends. Unlike salaries, dividends aren’t taxed at source and must be declared on your personal tax return. For the 2024/25 tax year, the dividend tax rates are:

• Tax-free allowance: £500
• Basic rate (8.75%): For dividends up to £50,270
• Higher rate (33.75%): For dividends over £50,270
• Additional rate (39.35%): For dividends over £125,140

The Perks of Paying Yourself Dividends:

• Lower tax rates: Dividends are taxed at a much lower rate than salary payments, allowing you to take home more of your earnings.
• No NICs: Unlike salary payments, dividends are free from National Insurance contributions.
• Flexible timing: You have the freedom to pay yourself dividends whenever you choose, without needing to adhere to a fixed pay schedule.

The Drawbacks of Dividends:

• Company profits required: Dividends can only be paid from the company’s profits, after corporation tax and other expenses.
• Limited pension contributions: The amount you can pay into your pension doesn’t increase based on dividend income.
• Formalities: Issuing dividends involves specific legal steps and paperwork, which can be a hassle.

3. Receiving Benefits-in-Kind (BIKs): Extra Perks for You

Another option is to receive benefits-in-kind (BIKs) from your company. These are non-cash rewards, like a company car or health insurance, that can be paid for by the company. While some BIKs are tax-free, others may incur tax and National Insurance contributions, depending on the type.

A common example is an electric vehicle, which may offer better tax treatment compared to a petrol or diesel car. However, the rules can be complex, and not all benefits are eligible for tax deductions.

Benefits of BIKs:

• Value for money: Some BIKs, such as company cars, can provide a high-value benefit at a lower personal cost.
• Potential tax-free perks: Certain benefits, like staff parties or low-cost office perks, may be tax-exempt, though these are limited for sole directors.

4. Contributing to a Pension Scheme: A Tax-Smart Move for Your Future

A company pension scheme is an excellent way to extract funds, as it’s tax-efficient and helps you save for retirement. Contributions made by your company to a pension are tax-deductible, reducing your corporation tax bill.

If you’re the only employee, the company can still make pension contributions on your behalf, and these contributions don’t have to come from profits. For the 2024/25 tax year, the annual pension allowance is £60,000.

Pension Scheme Perks:

• Tax relief: Contributions made by the company reduce your tax liability, and there are no NICs to pay.
• Long-term saving: The pension money is invested for your future, allowing you to build retirement savings in a tax-efficient way.

Downsides:

• Locked funds: The primary drawback is that pension contributions are inaccessible until retirement, which might not be ideal if you need immediate access to cash.

5. Taking a Director’s Loan: A Flexible, But Risky Option

A director’s loan allows you to take money from your company that isn’t in the form of salary or dividends. While this is a useful option, it comes with strict regulations and potential tax implications.

Loans of up to £10,000 are tax-free if repaid within 9 months and 1 day of the company’s year-end. However, if the loan isn’t repaid on time, your company will face a Section 455 charge—a high penalty of 33.75%.

Loans exceeding £10,000 require you to pay interest, and any unpaid interest can become a taxable benefit-in-kind, incurring additional NICs.

Benefits of a Director’s Loan:

• Short-term liquidity: A director’s loan is an option if you need quick access to company funds.
• Tax-free within limits: Loans under £10,000, when repaid on time, are free of tax and interest.

Risks and Drawbacks:

• Strict deadlines: Loans must be repaid within the required timeframe to avoid hefty penalties.
• Not a regular income solution: This method is best used for exceptional circumstances, not as a regular way to withdraw funds from your company.

Conclusion

Each method for extracting funds from your limited company has its own set of advantages and potential drawbacks. The best approach for you will depend on factors such as your business’s financial health, your personal tax situation, and your long-term goals. Always consider consulting with an accountant or financial advisor to ensure you’re making the most tax-efficient decisions for both yourself and your business.