One of the many misconceptions of clients wishing to start a Limited company
is the idea that the company’s funds are their funds. However, this is not the case.
According to the law, a limited company is a separate legal entity. As a result, you cannot take out money from a limited company and claim it as your own without following certain procedures.
The two main ways to extract funds from your company are:
- By salary payment
- By dividend payment
Directors of a Limited Company can choose to pay themselves a salary through the PAYE system in order to transfer funds from their company to their private bank account. The PAYE (Pay As You Earn) is the system which enables HMRC to collect tax and National Insurance Contribution
payments from your salary. Operating PAYE is the duty of the employer.
To obtain a salary payment the company must be registered with HMRC as an employer. Moreover, if you are the director you must also be register for Self-Assessment to report your income.
Depending on the salary you decide to pay yourself you may or may not pay Income tax and NIC .The NIC primary threshold as of 2017 is £8,164. This means that if you pay yourself an annual salary of £8,164 you will not have to pay NIC. Above that threshold you will have to pay, as an individual, 12% NIC. Additionally, your business will have to pay 13.8% of NIC on any income above the threshold.
In terms of income tax, the personal allowance stands at £11,500. As a result if you pay yourself such a salary you will be exempt from income tax but will still pay NIC. This personal allowance is lost in certain circumstances.
A dividend is a payment made from a company to its shareholders. The amount of dividend you receive depends on your ownership of the business and the available profits.
Dividends are issued once all costs, expenses and tax have been paid. It is important to note that the first £5,000 you receive are tax free in the 17/18 year; meaning you will pay no income tax or NIC. You will however pay 19% corporation tax (as this is mandatory).
Dividends in excess of the dividend allowance will create a personal income tax charge, starting at 7.5%.
In order to pay yourself a dividend, you are required to hold a board meeting where you “declare” these dividends. Additionally, minutes must also be produced.
You are required to follow this procedure even if you are the sole director and shareholder of your company.
Dividends can only be paid if the company has sufficient distributable reserves to do so. In practice, this means rolled up profits.
Contact a tax specialist
If you would like more information or have any questions about tax efficient ways to extract money from your company, then please do not hesitate to contact one of our tax specialists
at 020 8429 9245 or email [email protected]