How To Take Money From A Limited Company

How To Take Money From A Limited Company Overview

This guide is about how to take money from a Limited company

In this article you’ll learn about:

• Taking money as salary payments via the payroll.
• Paying shareholder dividends.
• Making payments through the Directors Loan Account.
• Capital extraction of funds using the Members Voluntary Liquidation process.

In this guide, you will learn how to take money from a Limited company legally.

A Limited Liability Company is a separate legal person from the owners and Directors.

People trade using Limited companies because of the benefits of being able to do business with protection from limited liability. There may also be tax benefits, which can be appealing.

However, because the company is not the same as the Directors or owners, the company’s money belongs to the company. Nevertheless, in order for Directors or shareholders to benefit from trading through a Limited company they need to be able to extract money legally from the company to in effect live off and put food on the table.

There are four ways to take money from a Limited company lawfully:

1. Director salaries through the company payroll scheme as employees.
2. Dividends.
3. Directors loan account.
4. Members Voluntary Liquidation.

Taking Money From A Company As Director Salaries

A Director or a shareholder can be an employee of a company and as such processed through the company payroll.

This is perhaps the most obvious way in which a Director or shareholder can extract money from a company.

Provided the Director or shareholder is employed and engaged in working for the company then this is a useful way to extract money, particularly because there are tax free amounts that can be extracted if there are no other sources of employment income for the relevant Director.

Family Members On The Company Payroll

However, what does need to be considered is that some Directors may put other members of their family on the payroll as a further means to extract funds from a Limited company. Family members put on the payroll who do not work for the company is not legitimate and could be challenged by HMRC.

Whilst PAYE and National Insurance can be deducted and paid over to HMRC about which there might be little scope for HMRC to complain there is still the issue of corporation tax. Corporation tax could be an issue for HMRC because all salary payments through the payroll are deductible for corporation tax purposes. If a family member were to be put on the payroll who did nothing for the company and who was an employee in name only then it is possible HMRC could challenge the deductibility of such salary payments for reducing the company’s liability to corporation tax.

Dividends As A Means To Take Money From A Company

The other very typical way for Directors (who are shareholders) and other shareholders to extract money from a company is by way of shareholder dividends. However, the company has to be profitable to pay money to Directors and shareholders in this way.

This can be a tax efficient way to extract funds from a Limited company because the company does not suffer any liability to Employers National Insurance Contributions. For the 2022 to 2023 tax year for salary payments of between £823.01 to £4,189 a month the rate of Employers National Insurance is 13.25%. For someone whose income is £50,000 per year the company would pay Employers National Insurance of £5,316.41 if they were paid that money through the payroll. If however sums over and above £9,876 a year were paid as dividends there would be no Employers National Insurance.

If however, a company is insolvent and not profitable then an unlawful dividend could arise that would have to be repaid. This is because dividends can only be paid from what is referred to as distributable reserves. These are the profits available from which money can be taken out of the company and distributed to the shareholders legitimately.

Before routinely taking money from a Limited company by way of dividends we would suggest you take professional accountancy advice because if there is a risk the company is insolvent you could discover the illegality of the dividend far too late in the day. An unlawful dividend taken in these circumstances is usually a very preventable situation with regular monitoring by the company accountants.

Directors Loan Account Means To Extract Company Money

Again taking money from a company through the Directors Loan Account is very common and can be entirely lawful.

If a Director is owed money by a company because they have lent money to it or incurred expenses on its behalf then there is no need to take money out by way of either salary or dividends and pay tax on the same. Provided the company is solvent you can simply withdraw funds from the company and offset such extractions from the Director’s loan account.

It is however a process that ought to be monitored and exercised with some care. It is worth taking professional accountancy advice when seeking to take money from a company through a Director Loan Account.

The reason is that if it turns out that a Director in fact owes money to a company after taking money from a company in this way then they will be liable to repay it. This is known as an Overdrawn Directors Loan Account. This is in essence similar to being overdrawn at the bank but instead of owing money to a bank, the Director owes money to the company.

If an Overdrawn Directors Loan Account is not repaid within 9 months of the year-end the company then becomes liable for corporation tax at the rate of 33.75% on the overdrawn balance by virtue of Section 455 of the Corporation Tax Act 2010. The reason is that the Overdrawn Directors Loan Account is treated as something akin to a distribution. When the Director repays the Overdrawn Directors Loan Account the corporation tax that has been paid at 33.75% will then, later on, be repaid to the company by HMRC.

Directors’ Loans And Liquidation

If a company goes into Liquidation with an Overdrawn Directors Loan Account then given it is the duty of the Liquidator to realise the company’s assets, the Director that owes money will be called upon to repay the same to the Limited company.

It is not uncommon for Directors of insolvent companies when attempting to save the company tax by taking money through their Director Loan Account (when they are owed money by the company), instead of by way of salary. However, there is a risk they will make a payment to themselves which could amount to a Preference if the company shortly thereafter went into insolvent Liquidation. We, therefore, suggest you take advice before opting for this method of extracting funds from an insolvent company. We are happy to assist you with advice in respect of the same.

Members Voluntary Liquidation Extraction Of Funds

A Members Voluntary Liquidation is a tax efficient mechanism to extract funds from a company.

Taking money from a company as salary, dividends, or through the Directors Loan Account is usually treated as income. A Members Voluntary Liquidation however can often be a means of taking money out as capital and instead give rise to the beneficial tax savings of capital gains tax instead of income tax.

In many instances when a business owner is ceasing trading and retiring the tax benefits can be attractive, particularly if the owners qualify for Business Asset Disposal Relief. This can result in a capital extraction of funds being subject to capital gains tax at the rate of 10%.

If you are thinking of ceasing trading a Limited company and looking for a tax efficient mechanism then we can help you with a Members Voluntary Liquidation procedure.

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