There may be times when you’ll need to borrow money from your Limited Company, but how do you go about doing so and what are the associated tax risks from doing so? Plus, is there anything you need to be made aware of before taking any money out?
In this blog we review all these points, to ensure you’re confident in the process and understand what taking money out of your Limited Company entails.
First things first, how does it work?
When taking money from your company it really doesn’t matter the amount or for how long, your first port of call is to know how much money you have in your business account, so that you’re aware how much there is to account for tax, any staffing costs, and other business depreciation elements.
Taking money legally out of your Limited Company
There are a number of ways in which you’re able to do so:
- By paying yourself a Director’s salary
- By issuing dividend payments from available profits within the company
- As a Director’s Loan
- By claiming expenses for business-related items
A Director’s salary
As a Limited Company director you’ll no doubt already be paying yourself a salary through PAYE. Depending on how much you pay yourself, you might need to pay National Insurance Contributions (NICs), and/or income tax. All salary payments are a tax deductible expense, therefore your company will not need to pay any Corporation Tax liability on this money. Your company will however need to pay 15.05% Employer’s NICs on any salary earnings which fall above the NIC Secondary Threshold of £9,100 (for the 2022/23 tax year).
If you do pay yourself a salary up to the NIC secondary threshold of £9,100 means no income tax or NI is payable. This amount still means you qualify for the State Pension and any benefit entitlements, as your income exceeds the Lower Earnings limit of £6,396 per annum.
Another popular salary level taken by directors is the tax-free Personal Allowance or £12,570, which allows you to not be liable for paying Income Tax, but you will need to pay employee NIC contributions on any earnings between £11,908 and £12,570.
A Limited Company’s shareholders are also able to take profit from the company in the form of a dividend. You’re only able to do so once there is profit within the company, otherwise the dividend is classed as ‘illegal’.
The total amount of dividend you’re able to pay yourself depends on the number of shares you hold within the company. So for example if you held 100% of the shares, then you’re able to pay yourself 100% of the dividend, and take the remainder of profit out of your Limited Company once all costs have been accounted for (i.e. tax expenses, etc).
All Limited Companies pay 19% Corporation Tax on taxable income (this will increase to 25% for all profits exceeding £250,000 from 1 April 2023). The first £2,000 of annual dividend income is taxed at 0%, and is also free from NICs and Income Tax. Any dividend amount that exceeds £2,000 will be subject to dividend tax which is based on your Income Tax band (basic, higher, or additional rate tax).
Before you pay out any dividends you must declare your intentions to the board of shareholders, and make a record of the meeting minutes. This provides a solid paper trail of what activity has taken place when, and what amounts were issued to whom. You’re also required to keep a record of a dividend voucher, which will also display the dividend’s details.
By taking money out of your Limited Company in the form of a Director’s Loan you’re able to:
- Lend money back to your company
- Borrow a greater amount from your company than the amount you originally put in
- Reclaim any money you originally put into the company
A record of Director’s Loans must be kept and maintained in a Director’s Loan Account, which must be shown as part of your company’s balance sheet.
Do note that if you decide to take more money than what has been paid into your company, your Director’s Loan will become overdrawn, and there are complex tax implications as a result. If your company owes you money, then the loan account will be in credit and you’ll be able to take money out without experiencing any tax liabilities.
For example – if the amount you owe your company is less than £10,000:
- There are no personal tax liabilities, but there could be tax consequences for your Limited Company if your loan is overdrawn for more than 9 months following your company’s yearend (your company’s filing deadline). Should this happen, the company must pay Section 455 Tax on the full amount overdrawn
- Section 455 carries a 33.75% tax charge (32.5% for loans prior to 06/04/22) which your company is liable to pay alongside its Corporation Tax liability
- Any outstanding loan amounts must be displayed on your company’s tax return
If the amount you owe your company exceeds £10,000 at any given point:
- If your company is overdrawn for more than 9 months from your company’s yearend, there may be tax consequences. Should this happen the company must pay Section 455 Tax on the full amount overdrawn
- Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/22) which your company is liable to pay alongside its Corporation Tax liability
- You must display any outstanding loan amounts on your company’s tax return
- If a director’s loan amount exceeds £10,000, if you repay the loan back to the company with interest applied (at HMRC’s official rate of interest) the loan will therefore not be classed as a taxable benefit
- If you don’t repay the loan to the company with interest, you’ll need to declare the loan via your company’s P11D and your Self Assessment Tax Return. This is because it is deemed as a benefit in kind (BiK) for the director to receive an interest-free loan from the company
- The value of the benefit will be calculated at the official rate of interest. Class 1A national insurance at 15.05% will then be payable from your Limited Company via form P11D and the benefit will also be included within your personal tax return, taxed at your appropriate rate of tax
What do you need to record for Director’s Loans?
- The value of money a director gives the company, excluding any share payments they may take
- The total value a director may borrow from the company
- Any interest that may be payable on the loan
These records are usually kept within the Director’s Loan Account. Depending on the total value borrowed, it may be subject to certain types of tax, and therefore it’s advisable to discuss any plans with your Aardvark Accountant before borrowing any money from your Limited Company.
What happens if your Director’s Loan Account has zero balance or is in credit?
If you take out less than the total balance you’ve put in, you’re not borrowing any money and will therefore be claiming funds which you’ve already paid in.
The Director’s Loan Account will either show a balance of nil or remain in credit, depending on the total amount you draw out. So long as your account is in credit, you can take out the available money at any given time.
What happens when your Director’s Loan Account is overdrawn?
If you take out more than what’s in there (discounting a salary payment, dividend or expense) the withdrawal is a benefit and will therefore be classed as a Director’s Loan. This will in effect make your Director’s Loan Account overdrawn.
Your Limited Company’s financial year
If your account remains overdrawn 9 months after the end of the accounting period, then HMRC will charge you S455 Tax at a rate of 33.75% (32.5% for loans prior to 06/04/22). You are able, however, to claim back the paid tax once you’ve paid the full amount of overdrawn money to your Limited Company.
So long as any expenses were incurred solely for the purpose of the business, you’re able to reclaim their costs. To be able to do so you must keep a record of all receipts. You are able to claim tax-deductible expenses in the form of:
- Parking and mileage costs
- Travel and accommodation
- Mobile phone contract costs
- Food and drink
- Computer and office equipment
- Training costs
- Postage costs
You’ll be reimbursed these amounts by your company when you’re paid (either weekly or monthly), or at any other time during the month that’s convenient to you, if you incurred the expense personally on behalf of the business. Your company must keep receipts of all expenses for a minimum of 6 years along with a record of what the expense was for and what is was.
How your Aardvark Accountant can help
Tax is confusing, especially when it comes down to working out your % margins, what taxes are due and when, and how much extra you could end up paying if you get your numbers wrong. That’s where your expert Aardvark Accountant comes in hand, to help you navigate the complex world of running your Limited Company. If you’re considering borrowing money from your company, speak to your accountant today.