As a director, you can pay yourself a salary from your company. In order to do this, the company must register with HMRC as an employer. Payments made to you from your company are tax deductible for the company, however, depending on the salary you pay yourself, the company may be liable to pay National Insurance Contributions. If you take a salary between £6,136 and £8,632 per year during 2019/20, you will avoid paying Income Tax and NIC and still qualify for State Pension contributions. Any salary taken over and above this amount would be liable to NIC.
As a shareholder, you can take your share of the profits out of the company as a dividend. The amount of dividend you receive will be based on the shareholding percentage you hold. The first £2,000 of annual dividend income is tax free, any amounts taken after this will be taxable at the tax rate of whichever tax band your income falls into. In order to pay a dividend to shareholders, you must hold a company meeting and minutes must be taken to declare the dividend, this process must be undertaken even if the company only has one director and shareholder. Once the dividend is declared, dividend vouchers must be drawn up to show the date of the dividend, who the dividend was issued to and details of payments. These company minutes and vouchers must be held on record by the company.
As a director you can take money out of your company. All money taken and paid into the company is recorded in a director’s loan account. This doesn’t have to be a physical bank account, it is required to keep track of what has been paid and when. A record of any such loans will be shown as part of your company’s balance sheet. If at the company’s year-end there is a balance owed to you as a director, you can leave this amount in the company, or withdraw the money. However, if you owe the company money at the year-end there may be tax consequences depending on the amount outstanding, when it is repaid or if it is repaid at all. You can also charge the company interest on the amount you have loaned the company.
There may also be times that you pay for company expenses personally, if this is the case, you can reclaim the money from the company by keeping receipts and recording expenses provided they are for business purposes only.
If you own property personally and the company uses it, you may charge a legitimate rent in relation to this. However, you should be aware of capital gains tax and inheritance tax implications and review these yearly for any changes in legislation, which could impact on taxes regarding the future disposal of the property.
There’s a lot of information to digest when it comes to the tax implications of different payment methods. Making a mistake may lead to investigations and further financial costs, so it’s important to plan what is right for you and your company, and you will be able to take money from your limited company without an issue, and enjoy the benefits of your hard work.