Most of the small business owners think that they are completely free to withdraw the money out of a limited company’s profits. Ultimately, the company is yours and you don’t have to answer anyone. Whatever the firm owns belong to you, and you can put to use wherever and whenever you want. If you come under the category of startup owners, you will soon discover yourself in difficulties.
A limited company is an identical legal entity from the owners. It has its rights and responsibilities. Contrary to sole proprietorship, after registering your business as a limited company with the Companies House, its profits, assets and liabilities don’t belong to you. They belong to the firm. It, therefore, means you cannot freely plunge into the company’s profits or asset-base.
If you are the owner of a limited company, the four methods you can adopt for taking the money out of the business’s bank account legally. However, you must conform specific procedures. Also, either of these is only regarded as legal if you don’t plunge more into the company’s net profit.
A Director’s Salary
Directors like the other staff team are usually considered to be the employees of the company. While you may be a business shareholder, you can consider yourself paying a monthly salary. However, you can register yourself for Self-Assessment. Moreover, the company need to register with HMRC as an employer. From the amount you obtain from the business in terms of salary, the firm must exclude income tax and National Insurance Contributions and revoke it to HMRC on a frequent basis.
You can select avoiding personal tax liability but still be entitled for pension and other benefits by paying yourself the amount below taxable income but within the primary threshold of NIC. Also, you can take additional income in the form of dividends if you are a shareholder in the company.
If you require extra money ahead of salary and dividends which you’re getting, you can withdraw money out of the company’s bank account in the form of director’s loan. However, you need to ensure that the procedure is managed accurately. It must be recorded and considered for in the director’s account. It is a better alternative when your director’s account is in credit. Normally, having a director’s account is a perfect way of running a company. It is not only a tax-efficient manner of borrowing money from the business but also permits you lending your business whenever there is a requirement.
Broadly speaking, dividends are paid to shareholders out of net profit. After excluding tax, costs and expenses the company finally pays dividend. In fact, dividends are considered to be illegally paid if the business has made no profits. If you consider of taking money from the company in the form of dividends, you are liable to pay income tax. When not tracked cautiously, dividends can be a tax burden to your business.
Another method of taking money from a limited company is by recovering business expenses that you have to shell out from your pocket. These may involve training fees, business travel, and mileage and office equipment. For doing so, you must submit receipts and fill claim forms. Additionally, such payments must be recorded by the company in the expense account and the receipts must be kept for a minimum of six years.
Are you looking forward to borrow money from your limited company but aren’t familiar with the tax obligations that come along with it? Get in touch with one of the best accountancy firms in London who can guide you through your various business decisions.