Just like an individual person, limited company is separate entity in eyes of law, so one cannot simply takeout the money from the business account as if it was their personal bank account. Legally the company is the owner of all the finances, so certain procedures must be followed to withdraw money from the business. It can be done by four ways: director`s salary, director`s loan, dividend payments and reimbursement of the expenses. Correct channels should be used for transferring all finances and they must be recorded accurately in the accounting records of the company.
Director's Salary:
As director of limited company, one can pay himself regular salary via PAYE. In order to do this one must have his limited company registered with the HMRC as employer. The income tax and the NICE may get deducted for every pay period, depending on salary one pays himself. Company will be required for this payment to the HMRC on a monthly or quarterly basis. The salary payments are tax-deductible expense so there won`t be any liability of Corporation Tax on this money; but the Employers National Insurance contributions will have to be paid on the salary.Many of the company directors give themselves salary up to lower profit limit of NIC which is £8,060 for 2015-16 in order to avoid paying the Income Tax and also to minimize the NIC liabilities, while remaining qualified for state pension and the benefit entitlement. One can also pay himself salary up to the annual Personal Allowance (tax-free) of £10,600 for 2015-16. This means one does not have to pay Income Tax on the salary but the NI liability will be slightly higher. The remainder of the income may be taken as the dividend payments for shareholder.
Shareholders` dividend payments:
You can decide to leave the surplus income in the company in order to further aims of your business. You can also take the share of profits of the business as dividends. The dividends are paid in accordance with the value and number of your shareholding. In case you are a sole shareholder in your company, you will be entitled to all the remaining income after deducting expenses, costs and tax liabilities of business.20% Corporation Tax is payable by companies on all the taxable income. The dividend payments are from profits after tax; there personal tax or the NIC are not payable on these dividends in case the total income is below £42,385. The figure may be achieved by paying yourself:
- £8,060 director`s salary and £34,325 dividends; or
- £10,600 director`s salary and £31,785 dividends.
- £8,060 is NIC threshold and £34,325 is Personal Allowance threshold
The mentioned figures are applicable to tax year 2015-16 (6th April 2015 – 5th April 2016)In you want to pay more to yourself; you should get higher dividends instead of higher salary as tax rates on dividends are always less than rates of Income tax. In order to pay dividend, a board meeting must be held and minutes should be taken, even if there is only one shareholder and director. In such cases, You only need to mention that you issued yourself dividend on a particular date, and you should keep the dividend voucher in order to show the details of payment.
Director's Loans:
You can also remove the money form your own company as director`s loan. The method may be used in order to lend money to the company, borrow money form the company which exceeds the amount which you put in company, or to reclaim the money which you previously put in the company. You should keep a record of such loans in the Director`s Loan Account and show it as part of the balance sheet of company.In case you remove the money from your company which exceeds amount you have put in the business, the loan account will be overdrawn. It is treated as benefit in kind. There might be some tax implications for your company and yourself. If you are owed money by your company, your loan account will be in credit. Money which is available may be taken out at any moment without tax implications as you will simply be reclaiming the money which you had put in your business.
If your company is owed less than £10,000 by yourself:
- You must declare loan on your Self-Assessment tax return.
- You might have to pay the Income Tax on interest due on loan.
- Class 1 National Insurance must be deducted by the company on your loan.
- Outstanding amount of loan must be shown on the Company Tax Return.
- The section 455 Tax will have to be paid by the company at 25% of overdrawn amount.
In case the loan is not repaid and is written off:
- Class 1 NI must be deducted by your company through payroll.
- Income tax must be paid by you on loan via Self-Assessment
Profits for the companies limited by guarantee:
The companies which are limited by a guarantee are normally setup by the non-profit organizations. They can also be set up by the profit making businesses. Such companies don`t have any shares or the shareholders. The surplus income is usually put back in business in order to promote and to achieve the non-profit goals of business. In case the company is not non-profit, the money can be removed from business as loan, salary and expenses. The payment of dividends is not applicable.
Can I continue to take salary in the current job if I set up a limited company?
One can be self-employed and employed at same time, therefore, one can continue receiving salary in the current job while managing and owning his own limited company as director and shareholder. Indeed, a lot of new business owners have to stay in the employment until they have suitable income from the business profits.Any money one receives from the company in form of director`s salary or/and dividend payments of shareholder`s should be included in the gross annual income for the purposes of taxation and one Income tax and the NIC must be paid in accordance with the combined income of both jobs. Such accounting can be time consuming and challenging, so one may wish to get an accountant.
Working out the Income Tax and the National Insurance Contributions:
There will be a requirement for you to prepare as well as file your Self-Assessment tax return annually. It should include the details of salary, expenses and benefits received from employment and also the salary, benefits, expenses and dividends received from you company. Second tax code will be issued by HMRC for income tax which you receive from company. Tax code for the existing job is most likely to remain same.As employee in your present job, your Income tax and the Class 1 NI will be paid through PAYE. Your employer will deduct it from you salary before paying it to you. You will need to work out amount of the income tax and the NIC which you owe on income received from the company – this is for the Self-Assessment.Class 2 and the Class 4 National Insurance might have to be paid by you. The Class 2 NI are charged at flat rate £2.80/ week, and Class 4 NI can be worked out as percentage of the self-employed profits, so this amount will be determined at end of tax year, when you will complete the Self-Assessment tax return. You might be permitted deferring some Class 2 or/and Class 4 NIC in order to avoid overpayment through the self-employment.Your Virtual Office London have helped form many thousands of companies for our clients over the past 4 decades. If you need help or advice on your business or start-up please contact us today.
