How to Take Money Out of a Limited Company

Your limited company is a separate legal entity, which means that its assets and profits belong to the company and not you. In the event of a lawsuit, your loss will be limited to what you have put into your business, and your personal assets will be shielded. 

On the flip side, you cannot just take money out of your limited company like a sole trader, whose personal and business assets are one and the same.

The following information is a guide. It should not be used as legal and tax advice. You should consult a licensed accountant to understand the different tax implications of each of the four ways to take money out of your limited company:  

• Pay yourself a director’s salary 
• Issue dividend payments 
• Take a director’s loan 
• Reimburse expenses 

Director’s Salary

To draw a salary, your company must be registered as an employer with HMRC, even if you, as the director, are the only employee of your limited company. The company will be required to submit monthly salary information, along with income tax and National Insurance deductions, as well as Employers National Insurance contributions. 

You can draw a salary up to your annual tax-free Personal Allowance (£12,500 in 2020) without having to pay income tax. National Insurance deductions may apply to part of those earnings. 

Dividend Payments

Dividends are generally more tax-efficient than paying yourself a salary over the personal allowance. They can only be issued if your company has made a profit, and after  accounting for tax and other financial liabilities. Your limited company does not pay tax on dividend payments. But you may have to pay income tax if payments are greater than the dividends allowance (£2,000 for 2020 – 2021).

Dividends can be issued at multiple points throughout the year. They must first be declared at a board meeting with recorded minutes. You must issue – and keep - a dividend voucher to show details of the payment.

Director’s Loan

A director’s loan is a loan from the company to the director. This method is quite complex, involving detailed tax treatments. You should navigate this method with a licensed accountant. 

Since your limited company is a separate legal entity, a director’s loan agreement must be drawn up between you and the company. Furthermore, all transactions should be recorded in a director’s loan account. These transactions will have to be included in the company’s balance sheet, tax return and the director’s self-assessment tax return.

Reimbursement of Expenses

Reimbursement applies to any expenses which you have paid for on behalf of the company in the course of running the business, such as travel expenses, business insurance and professional fees. The company can repay these amounts without incurring any additional tax.