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How do I take money out of my Limited Company?

Updated: Jul 1, 2022

Hint... you shouldn't just take it whenever you like

One of the biggest differences between running your business as a limited company rather than as a sole trader is the way you withdraw cash from your business.

When you operate as a sole trader - aka self-employed - there is no distinction between the business’ cash and your own cash, it’s all yours to do with as you please.

However, if you operate your business as a limited company, that is a separate legal entity. You can’t just take cash from it whenever you like because it's not your cash.

The two most common ways to withdraw cash from your Limited Company. These are:

1. Salary

2. Dividends

A tax efficient strategy for withdrawing cash from your company will usually include both salary and dividends. Let’s take a closer look at each of these…

1. Salary

Benefits of salary

  • It is an allowable business expense so your corporation tax bill will be reduced

  • Your company can pay you a salary even if the business is making a loss (if it has enough cash of course)

  • You can build up your qualifying years through national insurance contributions (you need 35 years of NI contributions for full state pension when you retire)

  • A low level of salary can get you a qualifying year of NI contributions without actually paying any NI

Drawbacks of salary

  • You and your company may incur NI Contributions if paid above a certain threshold

  • Salary is taxed at a higher rate than dividends

How do I pay myself a salary?

To do this your company needs to become a registered employer with HMRC and run a payroll scheme which complies with tax & pension regulations. Some of these key tasks are:

  • Provide payslips showing appropriately calculated tax & national insurance

  • Submit payroll information to HMRC on or before each pay day using approved software

  • Pay over the tax & NI due to HMRC every month/quarter

  • Operation of a workplace pension scheme & auto enrolment of new employees

Small businesses often outsource payroll to their accountant or a payroll bureau - Peart Accounting can take care of this for you.

2. Dividends

If your company is making a profit, then these profits can be distributed to the shareholders in the form of dividend payments.

Benefits of dividends

  • Dividends are taxed at a lower rate than salary, so it usually makes sense for small business owners to withdraw most of their cash via dividends

  • In fact, the first £2,000 of dividends received by an individual per year are tax free, so it’s almost always worth making use of that

  • You or your company do not incur National Insurance Contributions on dividends

Drawbacks of dividends

  • You can only pay dividends if your company has accumulated enough profit to cover them

The most tax efficient solution usually involves both salary and dividends

A common strategy is to pay yourself a low level of salary (enough to get a qualifying year of National Insurance, but without actually incurring any NIC payments) and using dividends to withdraw the rest.

A few common scenarios for the tax year 2022/23 are:

Salary £9,100 pa

This is appropriate where the employer can’t claim the Employment Allowance and doesn’t want to incur any National Insurance payments

Salary £11,908 pa

This is slightly more tax efficient than the above but some National Insurance Contributions are payable

Salary £12,570 pa

This is appropriate where the Employment Allowance can be claimed as the Employer’s NICs are covered by the employment allowance.

There’s no one-size fits all solution

Usually, a mix of salary and dividends is best but since everyone’s circumstances are different, the ideal salary vs dividends level can vary between one person to the next. Your accountant will be able to help you work out what’s best for you.

Book a free discovery call if you’d like some help figuring out what’s best for you and your business.

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