If you are an owner director of a company there are various ways to extract money from a limited company efficiently. Sensible planning of how you are going to take out money and a little tax planning is essential to find the best mix for you.
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Main ways to take money out
The advantage of paying a salary is that it uses personal tax allowances so potentially no tax payable by the owner director and is fully deductible for corporation tax.
Stefan regularly goes to see his clients in his own car. The mileage cost adds up to £100 per month. Over 5 years this adds up to:
- £6,000 of expenses that Stefan could have claimed from the company tax free.
- At 20% corporation tax, is £1,200 of corporation tax that could be saved.
- An amount should be kept in reserves for corporation tax payments.
- The owner director may wish to only pay dividends up to the higher rate limit, to prevent any personal tax being incurred.
- Dividend vouchers and board minutes should be produced.
- If cash isn’t available to pay the dividend immediately the dividend can be posted into the director’s loan account.
If the company does not owe any money to a director, the company may still loan money to the director, perhaps in advance to a future dividend payment or a possible short term loan. If this happens various things need to be considered:
- Loans should be repaid to the company within 9 months of the yearend to ensure that an additional corporation tax payment of 25% will have to be paid. The loan can be repaid in various ways e.g. by paying back with cash, awarding a dividend, awarding a bonus, repayment of expenses.
- If the loan is more than £5,000 the director may consider paying interest on the loan to prevent a benefit in kind tax being incurred.
We offer a free initial consultation to all prospective clients and the majority of our current clients are on fixed fees, within which tax planning sessions are included at no additional cost.