Limited companies are a popular business structure in the UK - It’s not hard to see why. Inside a company, profits are taxed via corporation tax. Corporation tax stands at 19%. This compares to income tax rates of 20% - 45%. Pretty good right?!
But this isn’t the whole story. In order to spend the money you’ve earned, you need to take it out of the limited company. This may attract tax. This is something that worries many business owners, and leads to questions:
- What’s the best way to take money out of a limited company?
- Can I take money out of my limited company?
- How to withdraw money from a private limited company?
In this article I explain different ways to take money out of a limited company. I also discuss the possible tax implications. Many company directors choose a mixed strategy of PAYE salary, dividends and repaying loans.
Limited companies are extremely popular with property investors. Not only are taxes lower, Section 24 doesn’t apply. Nearly every investor I know uses a limited company. If you already own properties in personal name, it’s possible to transfer them to a company – tax free. You can use Section 162 incorporation relief. I talk about how to do that in this article.
I write this article from my extensive experience as a property investor, businessman and investment banker. If you want to find out more, then go to the About Me page. I’m not an accountant however. You should always speak to a qualified professional before making any limited company tax decisions.
PAYE stands for ‘pay as you earn’ and is how most people get their salary. PAYE is also a way to withdraw money from a private limited company. Many limited company directors pay themselves a salary of £12,500 per year through PAYE. This has two main benefits:
- Any salary below £12,500 is free of income tax
- The profits in the limited company will be reduced by £12,500. This will reduce the corporation tax you pay
If you have a spouse, then you may choose to pay yourself and your spouse £12,500 per year. This means that you’ll take £25,000 out of your limited company without attracting tax. Many people view this as the best way to take money out of a limited company.
If your limited company makes a profit, then you can take money out with a dividend. The 1st £2,000 of dividends are tax free. Above this amount, the tax you pay depends on your income tax band. The dividend tax rates are as follows:
- Basic rate 7.5%
- Higher rate 32.5%
- Additional rate 38.1%
These tax rates are lower than the corresponding income tax rates.
Repaying loans is a great way to take money out of a limited company, as it’s tax free. This is good for property investors, as they’ll often lend money to their company, in order to purchase property.
For example, you may lend your company £100,000. Your limited company will use this money as deposit for a buy to let investment. This means that you can take £100,000 out of your company tax free and repay the loan.
If you’re a landlord, then also check out this article. I summarise the different taxes a property investor has to deal with.
You can take money out of a limited company tax free, by paying into a pension scheme. The Government provides generous tax breaks when you put money into a pension. They want to encourage people to save for old age.
My favourite type of pensions are SSAS pensions. You can buy property inside a SSAS. You can even lend money to your limited company, and create wealth outside your pension. I provide details of SSAS Property strategies in this article.
The bike to work scheme enables employers to loan bikes to employees as a tax-free benefit. As a company director, you may also be an employee – if you’re paying yourself a salary of £12,500 per year.
Your limited company may spend £1,000 on a bike. The company will lend that bike to the employee, i.e. yourself. This transaction will be free of tax.
Limited companies are a popular structure for businesses in the UK. Alternative structures include sole traders and partnerships. If you plan your affairs right, they can be very tax-efficient. In this article, I have given examples of how to take money out of a limited company.
Vin Gupta
If you take £12,500 in salary, you will pay some national insurance. But that money goes into your NI account, and you will receive a higher state pension Tax decisions are rarely clear cut
yaser javed
Also you would not take out 12500 in salary even if you could from your company as this will mean you will fall into the national insurance threshold. Most directors would prefer to stay below this and take out additional dividends tax free to make a total of 12500 + your 2000 tax free dividend.
Neil Smith
The PAYE section is not as per my understanding. You say that “Any salary below £12,500 is free of income tax”. I think you are referring to the income tax allowance. If so the salary would only be free of income tax IF YOU HAVE NO OTHER TAXABLE INCOME. It’s not that a salary is free of income tax it’s about total income. If I were a buy to let investor reading this I would think that I could withdraw £25k between me and my wife in addition to my normal salary,
Vin Gupta
Dear Neil Smith, thanks for reading my article. However, your comment is obvious. If you have other taxable income above £12,500, then your salary is above £12,500. And income tax is payable