How do I take cash out of my limited company?

You’ve got your new company up and running and you’ve started trading, but how do you take cash out of your limited company?

 

The golden rule to remember is that the company is not yours, it’s a separate legal entity to you, and you are effectively an employee, as a director.

Equally if you’re a shareholder, directors should vote dividends to be paid to shareholders, you can’t just take what you like.

Would you take cash out of your employer’s bank account? Well I hope not! So you can’t just take funds out of the company bank account whenever you like.

So how can you take cash out of your limited company?


1. Salary

As a director and employee, you can take a salary out of your company.

You could take a salary at the level you’re used to, say in a previous role, or at the level you need to meet your personal lifestyle.

However, to be tax efficient, best practice is to take a low salary, up to the national insurance or tax threshold.

This is mainly because you’re now an employee and employer, so you’ll be paying employee’s national insurance at 8%, plus employer’s national insurance at 13.8%!

That’s 21.8% national insurance, before we think about income tax.

  • previous employee national insurance rates were:
    • 10% From 6 January 2024 to 5 April 2024
    • 12% from 6 November 2022 to 5 January 2024
    • More info on national insurance rates and thresholds here

But this low level of salary is not likely to be enough to live on, so we’d recommend taking any further income as dividends.


2. Dividends

As we mentioned above, you can take dividends as a shareholder of your company.

This is quite tax efficient, as dividend tax is:

  • 8.75% for basic rate tax payers (instead of 20%)
    • 7.5% up to 5 April 2022
  • 33.75% for higher rate tax payers (instead of 40%)
    • 32.5% up to 5 April 2022
  • 39.75% for additional higher rate tax players (instead of 45%)
    • 38.1% up to 5 April 2022
  • From April 2024 the first £500 dividend is tax free for everyone
    • this was previously £1,000 from 6 April 2023 to 5 April 2024
    • before that it was £2,000 from 6 April 2019 to 5 April 2023

The directors officially decide on the level of dividends that can be paid to shareholders.

How much can you take as dividends?

This is the tricky bit though. You can only take dividends if you have the profits available in the company.

But it’s the profits after tax you need to look at.

So let’s say the company has profits of £50k.

You need to set aside 19% corporation tax (£9,500) into a separate bank account.

You could then in theory take what’s left as dividends: £40,500.

However, we would never recommend stripping out all of the profits and cash (a lesson COVID has taught us well).

We also need to look at accumulated profits. Let’s look at the above example again.

You have profits of £50k this year, but last year the company made a loss of £20k.

Therefore you only have £30k profits left, less your 19% tax of £5,700.

This only leaves you with £24,300 to take.

If your only income is from your limited company, then you’d only pay dividend tax of £2,082.50.

If you took this as salary instead, you’d be paying tax and national insurance of over £10k.

You can take dividends through the year, you don’t have to wait until your year end, as long as you look at available profits as we’ve shown above.


3. Funds loaned to the company

If you’ve put funds into the company bank account, to help get it going, or just to help out if cash has been tight, this can be repaid to you tax free.

This is because this is you effectively financing the company, so the repayment is like a loan repayment.


4. Expenses claimed from the company

You may pay for things for your company out of your own personal bank account, or credit card.

We would advise paying all company purchases out of the company bank account, as this keeps everything tidy, and means you’re not out of pocket.

But there may be some reasons you’ve paid for things yourself, such as paying for equipment or insurances/licences etc before the company is legally set up.

You may also claim for business mileage and working from home.

Make sure you keep a record of everything, so that you know what you’re owed.

This can be paid back to you tax free too, as you’re just repaying yourself.


5. Pre-start up costs

Before you officially set up your business you are likely to have paid out for items such as equipment, insurances and training.

As long as you keep receipts and a record, the company can repay these costs to you, and the costs can be included in the first accounts we produce.

You might also be able to claim back VAT on these pre-start up costs, check our VAT registration blog for all the details.


6. Costs that incur tax

Be careful when claiming certain costs, as these could create a tax problem for you and or your company, as they may be treated as a benefit in kind.

Here are some examples:

Company cars  used privately by employees or directors

Even if the car is “available” for private use, HMRC are likely to say that there is a taxable benefit here.

So if you or your employees park your company car outside their home, this is available.

Check out our blog on whether to buy a car through your company

Mobile phone costs

The company can only pay for your mobile phone if the contract and payments are in the company name.

If the contract and/or payments are in your name, and the company pays you back, this becomes a taxable benefit in kind.

Just get the contract and payments transferred asap into your company.

Home phone and internet costs

HMRC expect you to have a home phone and internet, which you will be using anyway for private use.

You can’t therefore claim these costs from your company unless you have a dedicated phone line and broadband connection.

We have a  blog on taxable benefits in kind and how these work to help you through this minefield!


What else do you need to know?

Our blog contains the basic rules, which may change with new legislation or your personal circumstances.

Please do get in touch if we can help you to make sense of all this, and provide more tailored guidance for you.

Check out our other limited company blogs and resources.

Take a look at our How We Work page to see how we could work together, and complete our Start form, if you’d like to discuss this further.