A limited company is a distinctive body in terms of the law. One cannot make a withdrawal of money from the company’s business account, whereas it is possible to make a withdrawal through your own personal financial account. All of the funds in a company rests in the business account, and there is a requirement to ensure some principle operations for withdrawal of money. There are about four different methods through which one can withdraw money. The money should be withdrawn from the account of salary/ owner’s salary; profit distributions (dividends); finance for director and, the offset of finances related to incurring expenses. It is necessary to make a transaction through accurate channels and maintain the record according to accepted principles.
Salary for the Director of a company
Being the director of a limited company, this is possible to get paid just like a normal pay via PAYE. If you want to perform such an action, the limited company should be enrolled with HMRC as an employer. Similarly, there is a requirement of Income Tax and NIC charges on your salary. You should be a regular income tax filer and not miss any periodical payment. The business will transact the payment to HMRC on a monthly or quarterly basis. The payments for salary also includes the expense that is completely tax deductible. Therefore, there can be no obligation of Corporation Tax on such payment. However, it is necessary to pay Employers’ national insurance grant on salary.
Various directors of the firms make explicit payment to their account in the form salary. The limited is according to NIC lower profits i.e. £8,060 for one year. In this way get rid of making an income tax payment and also lessen the liabilities of NIC. However, they remain qualified for the state pension and benefits entitlement. Or, one can just transfer an amount as a salary according to the annual Personal tax-free grant of £10,060 i.e. from 2015 to 2016. Through this, you will have no obligation to pay taxes on the salary. You will have marginal NI liability. The earning of the business left behind can be withdrawn as dividend profit.
Profits payments as dividend for Shareholders
Shareholders have the right to reinvest the excess profit for the wellbeing of business. Alternatively, you can just hold your part of income as profit. The profit dividends are disbursed based on the quantity and value of a share. If a person is the only owner of the company, he/she is allowed to take all the profits. These profits will be the remaining income i.e. revenue – cost= Profit.
Businesses usually make payments of 20% as a corporation tax. It is levied on all types of taxable incomes. Profit is paid after complete payment of taxes. That is why one has no need to pay tax on his/ her behalf. Your income should be an accumulation of salary, divides, and all other taxable income heads. The total figure should be below than 42,385 pounds. This amount can be paid in this way:
- Salary/Income of a director of £8,060 and profit dividends of £34,325 (the prior amount is defined by NIC); or
- Income/ Salary of a director of about 10,600 pounds, which is an allowance threshold and dividends of about £31,785.
N.B. These figures are according to the tax year from 2015 to 2016. The normal taxation year begins at April 6th, 2015 and ends at April 5th, 2016.
If you intend to take more income, then you should draw more amount of profit dividend instead of aiming for a high salary. The reason is very simple, tax rates of dividends are always less.
To make payment of such a dividend, do not forget to arrange a board meeting and make a note of important points. It should be done in every case, even if you are the single one in the company or owner. There is an obligation to follow these processes and maintain a record of payment. The record includes the important date, dividend voucher, and other relevant details.
Loans taken by director
Being a director, you are allowed to take money as a director’s loan. You can lend some amount from the company which is more than you invested in it. Then you can make a claim of lending the money you already invested in the company. In this way, the record will be maintained, and a transaction will incur inside the Director’s loan account. Similarly, it will become a portion balance sheet that belongs to your company.
If you take out an amount, which is comparatively more than you have already invested, then this lending will be known as ‘overdrawn’. It is conducted for a benefit and also includes some tax obligations. If the company you established has to pay back you some money, then this loan account head will be credited. You are allowed to take out the money for use from this account without any worry of tax.
If your company has to pay you an amount lower than 10,000 pounds:
- On your behalf, there would be no tax obligations. Otherwise the company may have to face some taxation liabilities
- If this loan amount is kept overdrawn more than the defined period by taxation laws i.e. 9 months and one day, then your company will be bound to make a payment of tax according to Section 455 Tax on the overdrawn amount. It will be based on the company’s account reference date.
- You should expose the amount of loan in Tax return of the company.
- 25% Tax is considered to be included in Section 455 Tax. As this is one of the tax obligations, your company will pay it with all other tax liabilities.
If you have to pay your company an amount greater than £10,000:
- You will have to show that on a Personal Income tax return.
- If the loan has some interest, then you may have to pay income tax on it. It implies in certain conditions.
- The company must deduct Class 1 National Insurance on the loan.
- The same outstanding loan amount must be declared in Company Tax Return.
Profits for companies limited by guarantee
Limited by guarantee are for those companies that are incorporated by Non-profit organisations. Still, there is an option to set up such company by a profit making business. The thing that differentiates it is, there are no shared or shareholders act as a part of the company. All of the earnings and revenues are reinvested with the aim of achieving non-profit goals. If the intention of the firm is not non-profit activity, then the income can be withdrawn under the account heads like loan, expense, salary. However, the concept of dividend payment does not apply here.
Can I continue to take a salary in my current job if I set up a limited company?
There is an option to be both employed and self-employed at the same instant while the income from a limited company will be considered as the income of a shareholder or director. However, there is no objection to take the job salary and limited company’s income at the same time. Whereas, various entrepreneurs do not leave the job until their company achieves some defined targets.
National Insurance Contributions and Income Tax will be applied on both of the incomes. The first one is the salary while the second one is the income taken as a director’s salary or dividend. The overall NIC and tax will be levied on the accumulation of both incomes. However, different experienced people are of the view that it is difficult to make a proper accounting system of such income. An inclusion of accountant or tax advisor can be a good idea for this challenging job.