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Limited companies are a popular business structure in the UK - It’s not hard to see why. Inside a limited company, profits are taxed via corporation tax. In 2021, the corporation tax rate was 19%. This compares to income tax rates that range from 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 – i.e. you’re taxed twice! 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.
Note that each of the images in the article pops out into a slideshow.
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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.
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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. As of 2021, 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. You can’t access the money until you’re 55, so there are other things to consider.
I’ve given more details about pensions and other income tax investments 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.