How to Take Money out of a Limited Company

So you have secured your first contract, raised your invoices and the money is starting to roll in to your company bank account. Great! Now how do you get it out of there?

A key advantage of running a Limited Company is the opportunity for tax planning and to split your income across different allowances and thresholds. Unlike a permanent employee or sole trader, who are taxed across their fixed personal tax bands and have no room to manoeuvre, a Limited Company gives a couple of different avenues to get your money out tax efficiently.

Salary

You will nearly always want to pay yourself a salary – drawing a fixed monthly amount out of your company. Not only does this give you a stable ‘base’ income, it is offset against your company profits (reducing your Corporation Tax liability) and allows you to make best use of your personal tax allowance, as well as providing a qualifying year for your State Pension.

The most common way to draw a salary is to pay yourself up to the National Insurance threshold. As of 2017/18, this means drawing £680 per month, or £8,160 per year. This way, you have zero liability for National Insurance and personal tax – more on that later – so you take home 100% of the salary.

Since you are above the Lower Earnings Limit – £490 per month – your earnings will still count as a qualifying year for the State Pension, even if you are not paying any National Insurance.

Running a monthly payroll requires a fair bit of administration. If you have specialist knowledge you can do this yourself, but it is one of the tasks most contractors delegate to their accountant.

Additional Salaries

It is also common to pay a partner or spouse a salary, for the help their provide to you in running your company. They will be able to take advantage of their own personal tax allowance, so there won’t be anything additional to pay and they can take out 100% of the money paid to them, after tax.

It is important to note that anybody on your company payroll must be doing work for the company, otherwise you can fall foul of the taxman. Leaving office administration and general duties to your partner is common and allows you to get on with your contract work.

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Dividends

Dividends are retained profits paid from the company to its shareholders. You can find more detailed information on how dividends work and how they are taxed here, but here is a quick recap:

Dividends can be drawn out of the company as long as the company has sufficient retained profits to cover them. They are also payable after Corporation Tax and attract their own tax liability, so you need to ensure you put enough money aside personally, to cover any taxes due come the end of the tax year.

In addition to a £5,000 tax-free allowance for dividends, any unused personal tax allowance can be used to cover dividends. So using the salary example above, taking a salary of £8,160 per year leaves £3,340 left over from your personal allowance of £11,500. This means that, taking a salary at the NIC threshold, you can draw £8,340 in dividends without any tax due. Dividends do not attract any National Insurance, no matter how much you take.

When you pay a dividend from your Limited Company, you need to issue a dividend voucher. It’s recommended to do this immediately, in order to keep on top of your paperwork. If you have additional shareholders (not the same as paying someone a salary!), the amount of any dividend paid is split between shareholders, in proportion with the percentage of shares held.

Dividends are otherwise taxed on the same thresholds as your other personal income, but with different tax rates.

What if I fall within IR35?

Operating within IR35 is a different beast entirely and changes the way you can draw money from the company – speak to any long term contractor and they will give you their opinion on IR35!

If you are acting as a ‘disguised employee’ – following the same working patterns as a permanent member of staff – then you will fall foul of this legislation. In this case, you declare the majority of your contract income as a ‘deemed salary’ to HMRC and pay tax and National Insurance as if you were a salaried employee.

HMRC are clamping down on contractors operating outside of IR35, so you need to make sure that your contract is watertight and that your working practices reflect this. See our guide to IR35 for more in-depth information.

General information

Your accountant will take care of all salary and dividend advice for you. It is possible to take care of your own Limited Company without an accountant, but unless you have specialist experience, you are likely to find the investment in time and effort isn’t worth it – plus you run the risk of doing it incorrectly and leaving yourself open to an HMRC investigation in the future.

Keep on top of your paperwork! There are several deadlines to meet throughout the year and an organised routine – invoicing, bookkeeping and additional paperwork – means that you will never be stuck with hours of admin come year end. It also makes life easier for your accountant – something we are entirely in favour of.

A specialist contractor accountant deals only with contractor Limited Companies – structuring income in the most tax-efficient manner is their bread and butter. For more information, or to set up a Limited Company with Dolan Accountancy, give one of our specialist contractor accountants a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.

Whats next…

Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, ContractorUmbrella, it means we can offer one low cost, fixed fee package at £95 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of ContractorUmbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, ContractorUmbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use CashPlus free of charge for the first year, saving you £69.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.

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