Withdrawing Money From Your Limited Company
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what is the easiest way to withdraw money from your limited company? Which is the most tax-efficient?
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
How To Withdraw Money
Limited company directors can withdraw money from the business multiple ways:
- Salary;
- Dividends;
- Director’s loan;
- Pension contributions;
- Trivial benefits and staff party; and
- Business Asset Disposal Relief.
Salary and Dividends
Assuming you have no other sources of income, a tax-efficient way to take money from your limited company is via a combination of salary and dividend payments. This method works by paying yourself a specific salary and then paying out the rest of your post-tax profits via dividend payments.
Identifying the correct salary can be difficult; you must consider the National Insurance thresholds for employers and employees. If you take a salary higher than the employer and employee National Insurance thresholds, you will effectively pay National Insurance twice on the same income. You’ll pay once as an employer and once as an employee – not a tax-efficient way to operate.
For the year 2024/2025, the most tax-efficient way for a sole director/employee to withdraw money from their limited company is to take a gross annual income of £50,270, this being split into:
- £12,570 as salary; and
- £37,700 as dividends.
Assuming no other sources of income, and the employment allowance is not claimed, this results in a take-home figure of £47,062 per year, or c.£3,922 per month.
Your director’s salary counts towards your tax-free personal allowance. Assuming you have no other sources of income, you will pay no income tax as long as your salary remains below the £12,570 threshold. Dividend tax will be owed on the £37,700 withdrawn; however, the basic dividend tax rate is currently 8.75%, far less than the basic income tax rate of 20%.
At £12,570, your salary exceeds the Secondary Threshold for National Insurance. As a sole director, you can’t claim the employment allowance, which will incur Employer NI contributions of roughly £479 per year.
As salaries are an allowable expense for corporation tax purposes (see below), reducing your corporation tax bill from paying yourself a higher salary offsets the Employer’s NI owed. You will save at least £750 in corporation tax (more if your effective tax rate is higher than 19%) against the Employer’s NI owed of £479.
£12,570 is above the Lower Earnings Limit but below the Primary Threshold. You will earn National Insurance credits (contributing to your state pension), but you won’t have to make any employee National Insurance contributions.
Although £12,570 is the most tax-efficient salary for a sole director, it involves making National Insurance contributions. Some limited company contractors prefer to avoid this extra burden, so they reduce the salary to £9,100, a level where no National Insurance is due.
At £9,100, your salary is at the Secondary Threshold and below the Primary Threshold, so there is no employer’s or employee’s National Insurance. It is higher than the Lower Earnings Limit, so you will continue to earn National Insurance credits.
Although £9,100 is more straightforward regarding administration, you are roughly £180 worse off than the salary of £12,570 due to less of an offset against your corporation tax bill.
The £180 is calculated as (£12,570 – £9,100) * 19% – £479.
Employment Allowance
The employment allowance allows eligible employers to reduce their Employer’s National Insurance liability by up to £5,000. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £5,000 has gone or the tax year ends (whichever is sooner).
You can only claim against your employers’ Class 1 National Insurance liability up to a maximum of £5,000 each tax year. You can still claim the allowance if your liability was less than £5,000 a year.
There are multiple criteria for eligibility, though the relevant one here is that a company is not eligible for the employment allowance if there is only one employee in the company and that employee is also a director.
What this means in practice is that if you are a limited company contractor and you employ your spouse, you can both take salaries of £12,570 and use the employment allowance to reduce the Employer’s National Insurance liability to zero.
Director's Loan
A director’s loan occurs when a director borrows (or loans) money from (to) their limited company. HMRC defines a director’s loan as money taken from a company that is neither:
- A salary, dividend, or expense repayment; or
- Repayment of money previously loaned to the company.
Director’s loans provide access to financing above and beyond salaries and dividends and may be utilised to help ease short-term personal financial issues. A record must be kept via the director’s loan account, shown as part of your company’s balance sheet.
If the company owes you money, your loan account will be in credit. In such instances, you can reclaim this money anytime without facing additional liabilities such as income tax. If you take more money from the business than you have loaned, your director’s loan account is said to be overdrawn.
If your director’s loan account is overdrawn, there may be tax implications:
i) Withdrawn by less than £10,000
You will not face any personal tax liabilities, but there could be consequences for the business. If the loan remains overdrawn for longer than nine months and one day from the company’s accounting reference date, your company will have to pay Section 455 Tax on the overdrawn amount.
Section 455 Tax is charged at 33.75%, and your business will pay this alongside its Corporation tax liability.
ii) Withdrawn by more than £10,000
You must declare the loan on your self-assessment tax return and potentially pay Income Tax on any interest owed. The business must also deduct Class 1 National Insurance from the loan amount.
Section 455 Tax will be due at the 33.75% rate.
Pension Contributions
Contributing to your SIPP is an excellent way of saving for retirement and a tax-efficient way of using your business’s profits. The company’s contributions to your pension are allowable expenses, meaning you reduce your taxable profits and, therefore, your corporation tax liability.
Another benefit of making employer pension contributions via your limited company is that employer pension contributions are not subject to National Insurance.
Your annual allowance limits the pension contributions that can be made to all your pension schemes in a tax year (06 April to 05 April) before you have to pay tax on them. The current annual allowance is £60,000.
See our guide to Limited Company Pensions for further details.
Trivial Benefits And Staff Party
Contractors often overlook trivial benefits and the annual Christmas/staff party when considering how to withdraw money from their limited company.
Trivial Benefits
Trivial benefits are tax-free employee benefits, described as ‘trivial’ as they have little monetary value. Unlike benefits in kind, trivial benefits don’t need to be declared to HMRC and are exempt from tax and National Insurance contributions.
What is ‘trivial’ can be subjective, so HMRC has defined specific criteria that must be met. The benefit must not:
- Exceed £50 in value;
- Be a cash payment (gift vouchers are allowed);
- Be part of an employment contract; or
- Be a reward for regular employment duties.
No definitive list is considered trivial, but examples include gift cards, flowers, chocolate, hampers or even a staff meal. In addition, there is an annual cap of £300.
You can take advantage of the trivial benefits with gift cards (say, 6 restaurant vouchers of £50 each); however, the vouchers must not be redeemable as cash. They can only be exchanged for goods and services.
Staff Party
A staff party or an annual function qualifies as a tax-free benefit, so long as:
- It is open to all employees;
- Be an annual event (such as a Christmas party or summer barbeque); and
- Cost £150 or less per person.
What this means, in practice, is that contractors can treat themselves to a meal out worth up to £150 once per year, which will be paid for by the company. An even greater benefit is that you can bring a partner/spouse, and they will also receive the £150 spending limit (for a total of £300).
Business Asset Disposal Relief
Business Asset Disposal Relief (‘BADR’), formerly Entrepreneur’s Relief, is a capital gains tax relief available to eligible individuals disposing of their businesses. Most contractors working through their limited company qualify for BADR as they are the business’s sole director/employee.
If you qualify for BADR, you’ll pay tax at 10% instead of the standard rate of 20%.
Given the complexities involved, we have written a separate Business Asset Disposal Relief guide.
Frequently Asked Questions
Once you have paid the corporation tax owed on your company’s taxable profit, the remainder is known as ‘profit after tax’. Profit after tax can be delivered to shareholders in the form of dividends. Dividends are distributed based on the percentage of shareholding each shareholder owns. For sole directors/shareholders (such as most limited company contractors), this shareholding is 100%.
To make a dividend payment, you must hold a director’s meeting to ‘declare’ the dividend and keep minutes as a record. You must do this even if you’re the only director (although the meeting would be less formal and the minutes brief).
For every dividend payment, a dividend voucher must be issued. Dividend vouchers show the:
- Date of payment;
- Amount of the dividend;
- Company name; and
- The name of the shareholder being paid.
Dividends can be paid at any point of the year, providing sufficient profits or retained earnings are available. You must have adequate funds available to pay your corporation tax liability at the end of the year.
Unlike salaries, dividends are not subject to National Insurance contributions. They’re also taxed at lower rates than wages and have a separate dividend tax allowance that can be used on top of the personal allowance. For this reason, most limited company owners prefer to withdraw money from the business by maximising dividend payments.
Retained earnings, or retained profits, are the business profits that are kept within the limited company. They are not paid out to shareholders as dividends. Retained earnings can be used to plan tax-efficient distributions of dividends.
For example, if you have significant earnings from other sources in the year your company's profits are earned, you may choose to forgo the dividend payment in that year. Leaving the profits in your company and paying a dividend later when you have lower or no other income could mean that the tax rate applied to the dividend payment is lower.
In situations where you have other income (pension income, a second salary, rental income, etc.), taking a £nil salary from your limited company may be advisable. If you have other sources of income, then you may have already used up your entire tax-free personal allowance. If this is the case, then you should take no salary and pay yourself entirely via dividends.
National Insurance and Income tax becomes due when your salary exceeds £12,570 per year. Even when accounting for the reduction in corporation tax, the rates for NI and Income Tax combined are higher than the dividend tax rate. It is, therefore, more tax-efficient to pay yourself dividends.
You will build up qualifying credits for your state pension if your salary exceeds the Lower Earnings Limit of £6,396 per year. If your salary is above the lower Earnings Limit but below the Primary Threshold of £12,570, you will build up qualifying credits without paying any employee National Insurance Contributions. Employer National Insurance contributions must still be paid from the limited company.