How to Take Money as a Director of a Limited Company

Running your own limited company? Congratulations. You’ve just gained a separate legal entity.

Which is a fancy way of saying that the money in the company is not your money. It belongs to the company. Even if you’re the only director. Even if you made all the sales. Even if you’d like to treat yourself to a shiny new bike.

Here’s how it works.

– A limited company is a separate legal person in the eyes of the law.
– You and your company are not the same.
– This separation protects you. If the company gets into trouble, creditors can only chase the company. Not you personally. That’s the “limited liability” bit.
– But it also means you can’t just dip into the company bank account whenever you fancy.

So, how do you actually get money out? There are four main ways.

1. Salary (PAYE)

A salary is the most straightforward way to take money out of your company. You put yourself on payroll and pay yourself like any other employee. The company recognises this as an expense and it reduces your taxable profits.

National Insurance is due on any salary over £5,004. So while you won’t pay personal tax on £12,570, you and the company may still pay National Insurance if there are no other employees.

There is also an “optimum salary level” that balances PAYE and National Insurance. We’ll save that for another blog.

– A common choice is £12,570. That’s the current personal tax-free allowance.
– You’re moving your allowance from “you as an individual” into “you as a director.”
– The company pays you, and you personally don’t pay tax on that bit.
– The company also saves corporation tax on that salary.
– Example: £12,570 salary means you still get £12,570 tax-free. The company reduces its profits by the same amount and saves corporation tax.

2. Dividends

Dividends are how you reward yourself after your company has made a profit. They are not expenses, so they don’t reduce your company’s taxable profit. Instead, they are a way of sharing the profits with shareholders, which in your case probably means you.

– Dividends come from profit. No profit, no dividends.
– Profit is turnover, less expenses, less corporation tax. What’s left can be paid out.
– Keep an eye on your profit and loss. Check monthly if you can.
– But don’t get carried away. Profit at the start of the year doesn’t guarantee profit at the end.
– Take too many dividends and you’re in murky waters. That’s not allowed.

3. Director’s Loan

A director’s loan is money you’ve personally put into the company. Think of it as lending your company cash to get started or to cover costs. The company owes you that money back, and when it’s repaid, it’s tax-free.

– This money sits on the balance sheet as owed back to you.
– You can repay yourself when the company has the cash. Tax-free.
– Example: You put in £5,000 to buy a laptop and kit. The company owes you £5,000. When the money’s there, you take it back.
– For larger loans, you can even add interest.

4. Pensions

Paying into a pension is less about today and more about your future self. Contributions made by the company are treated as an expense, which means they reduce your profits and your corporation tax bill. It’s a tax-efficient way to save for retirement.

– Pension contributions work just like they do in big companies.
– Example: £100 into a pension is £100 off company profits for tax.
– You can contribute for directors and employees.
– But you can’t get at that money until you’re 55 without a hefty tax bill.
– And no, we’re not pension advisors. Get proper advice before jumping in.

The Bottom Line

– Salary gives you tax efficiency.
– Dividends reward you after profits.
– Director’s loans give you back what you put in.
– Pensions help you plan for the future and cut today’s tax bill.

Each has its place. The trick is using them in the right balance for your business and your goals.

Want to know which mix works best for you and your company?  Get in touch with Blue Leaf Accounting and we’ll make the numbers behave.

We are accountants in Leighton Buzzard, Bedfordshire, supporting clients locally and across the UK with all their accounting and tax needs. If you’re looking for experienced accountants in Leighton Buzzard or the South East, get in touch to see how we can help.