Tips for withdrawing money from your Limited company
For owners new to running a limited company or even those used to trading as self employed, being able to grasp this concept of a separate legal entity, and the implications this has on the ability to withdraw profits, is key.
The artistic accountant should devote considerable time to your remuneration plan and package, starting off by trying to understand you and your family’s personal requirements and how these fit in with the performance of the company, both historically and moving forward; after all there’s no point running a profitable business if you can’t share in the fruits of your labour.
When it comes to extracting profits, each limited company needs to be looked at on its own merit and to take into account all the specific circumstances. To help you when it comes to discussing this topic with your accountant, here is a brief summary of some of the more familiar methods of withdrawing money from a limited company:
1. Remuneration – This means payments such as wages, salaries, bonuses etc that are taxed by HM Revenue & Customs as employment income. Providing you are a Director or employee of a company, these payments are an allowable deduction against the Corporation tax liability of the company. Effectively, if the company makes £100,000 profit, and you pay remuneration to yourself of £20,000, as a basic example, then the £20,000 ‘profit’ you have withdrawn has no corporation tax liability.
Instead, there exists an income tax liability for the person receiving this payment, the amount of which is dependent on their total income for that particular tax year. An additional tax burden is borne in the form of Employers National Insurance, a ‘tax’ that is currently levied at 12.8% on all salaries paid to all employees. Remuneration isn’t therefore a low cost option.
2.Dividends – Shareholders in limited companies can be entitled to dividends, which are payments made out of profits. Unlike remuneration, dividends are not an allowable deduction against corporation tax liability, however, they are considered as being received net of a 10% tax credit which mitigates the supplementary income tax charge the recipient will be liable to. Even though dividends are not subject to any additional National Insurance tax, the overall effective tax rate – for higher rate payers at least – is somewhat similar to withdrawing through remuneration, in the region of 46-47%. Dividends may be more efficient though if the company spreads the shares amongst family members or spouses.
3. Interest – If you funded the company by means of a director’s loan through its formative years, then there is no reason why the company shouldn’t pay interest – at a fair, commercial rate – on that loan. This interest repayment could then become a form of profit extraction. The tax treatment is similar to remuneration, in that the company gains an allowable deduction on the interest paid, but unlike remuneration there is no national insurance charge. Where the company profits exceed a certain amount, this method is definitely better than remuneration or dividends.
4. Rent – Similarly to interest, if you run the company and own the premises from which the company trades, you could charge the company a rent (or allow them the premises rent free!). If you charge a rent that is in line with a fair market value, then this becomes another method of extracting profit that is allowable for corporation tax deduction, as well as avoiding a national insurance charge. One potential hurdle to this method is the new capital gains tax (CGT) rules for entrepreneurial relief, which, if you sold both business and property at the same time, could result in a significantly higher CGT.
5. Loans – The basic idea is that you arrange for the company to lend you money. However, be aware that loaning money from a private company is illegal, although there doesn’t seem to be any effective sanctions for breaking this law. If this happens, whether it’s an overdrawn directors account (technically a loan) the HM Revenue & Customs will charge 25% of the loan as a tax charge to the company. As it happens, this 25% tax charge is equal to the amount of tax that a higher rate (40%) tax payer would pay if the amount was received as a dividend rather than a loan! The only difference being that the company suffers all of the tax.
6. Selling assets to the company – To take advantage of lower capital gains tax, you could sell an asset to the company. For example, a property you own, or even the goodwill of a business that you are putting into the company. Providing the price the company pays you is a fair market price, then you can receive payment out of current or future profits without being subject to any tax higher than the relevant CGT rate. In some cases this could be as low as 10%.
7. Liquidation – The most drastic form of extracting profits is to liquidate the company. If the company counts as a trading company for the purposes of entrepreneurs relief, then you will have no more than 10% tax to pay, because liquidation proceeds are subject to CGT and its associated reliefs (such as entrepreneurs relief) and not income tax. However, liquidation is quite a serious step that is not without consequence, so professional advice is always recommended.
Hope this helps!