How to extract your profits from your limited company

Your limited company is a separate legal entity to yourself and it is important that it has its own bank account.

You should only draw out money from the company as:

1. Salary under PAYE/NIC
2. Dividends
3. Reimbursement of expenses
4. Repayment of a credit balance on your director’s loan account

Do not let your director’s loan account go overdrawn

If your director’s loan is overdrawn at the period end, then if it is not repaid within 9 months of your year-end then there will be a tax charge of 32.5% of the amount overdrawn. The account must remain repaid as there are anti avoidance measures where director’s loan accounts are paid back and then drawn out again. If the director account is overdrawn by more than £10000, there will be a beneficial loan interest charge on you. The company will have to pay Class 1A NIC and you will have to pay income tax on the charge.

Is your company an intermediary?

If you are providing a service to a customer through your limited company then you have to look at the contract. From 6th April 2024, your customer must determine whether or not your company is an intermediary unless they are a small entity. You should receive a notice of an employment status determination from your customer which will show whether they consider. If you are deemed to be a worker, the customer must operate PAYE and NIC on you as if you were employed. You can disagree with a determination and you would need to contact your customer. If your customer is a small entity then it is still your responsibility to determine your employment status and operate under IR35 if appropriate. If it is a contract of service, IR35 will apply. If it is a contract for service, IR35 will not apply. In some situations, it is difficult to establish the type of contract. If IR35 applies, it is necessary to pay a charge equivalent to the PAYE and NIC which would have been due on 95% of the income received. Where IR35 applies, we recommend paying a full salary of at least 95% of the income.

How do you extract money from your limited company?

1. Salary
If the company would be liable to tax under IR35 then a salary should be paid and there is little scope to pay dividends. Otherwise, salary should be paid up to the secondary threshold for NIC (currently £9,100) if you are a sole employee or up to the income tax personal allowance threshold if there are two or more employees (including yourself) assuming that the company has sufficient funds. If you have no other earnings then you should pay at least above the lower earnings limit (£123 per week from 6th April 2024) to ensure that you get your national insurance contribution credit for the tax year.
To pay a wage from the company, you need to ensure that you are carrying out sufficient work for the company to warrant the wage you wish to declare.

2. Dividends
Provided that the company is not subject to IR35, after the salary noted above, dividends should be considered. Dividends can only be paid if the company has sufficient distributable profits. The rates of tax on dividends for 2024/25 onwards are £500 at 0% and any remaining personal allowance is also charged at 0%, any dividend in excess of this are taxed at your marginal rate as follows; Basic rate band 8.75%, Higher rate band 33.75% and Additional rate band 39.35%.

3. Reimbursement of expenses
If you incur any expenses on behalf of the company, providing they are wholly and exclusively for the purpose of the business these should be reimbursed.

4. Repayment of a credit balance on your director’s loan account
If you have paid monies into the company or there are undrawn dividends or salary then these can be drawn out without any charge.

DISCLAIMER
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S Thandi or M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.

UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.

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