How to Take Money out of a Limited Company: What Are My Options?

August 25, 2023 / Business Tips

Directors often put profits back into their company, but there comes a time when a director will want to take some money out. This could be for a range of reasons, but the question remains the same – how exactly do you take money out of a limited company?

In this article, Clarke Bell will answer this question, discuss the options directors have at their disposal, and cover what each one can do for you. 

We would also strongly encourage you to speak to your accountant about this topic, as they are likely to have a full understanding of your financial position.

Paying a salary

The first and most common method to take money out of a limited company is to pay yourself a salary. This is easily done; after all, directors are employed at their company, and so can be paid a salary like any other employee. However, although this is the easiest method of taking money out of a limited company, it is undoubtedly the least efficient.

As with any other salary, directors must pay income tax and national insurance on earnings they receive in the form of a salary. Most directors opt to pay themselves a small salary, usually no more than the personal annual allowance, thereby allowing themselves to pay no tax on their salary. Anything over this amount will be subject to income tax.

Directors can pay themselves a higher salary than the personal allowance if they intend to pay business expenses from their personal finances. These expenses can be claimed back, resulting in a lower tax expense. This can be particularly useful for sole traders, where personal and business finances are one and the same.

Taking dividends

Dividends are a method of taking money out of a limited company that is often used in conjunction with paying directors a salary. Compared to a salary, dividends are substantially more tax-efficient, as they have their own personal allowance and comparatively low tax rates. 

Basic dividend tax rates are 8.75%, with the higher and additional rates sitting at 33.75% and 39.35%, respectively. However, the personal allowance has fallen considerably as of the 2023/24 tax year. Whereas it once was £2,000, it now sits at £1,000. Anything below this figure will not be taxed, even if you have already paid yourself a salary at the personal allowance of £12,570. 

Take note that if you decide to pay out dividends, your company must be profitable enough to cover the payout. Failing to ensure your company is sufficiently profitable before paying out dividends will lead to them being classified as unlawful dividends. This will likely mean that you, and any other dividend recipients, will be compelled to pay them back to the company.

Taking out a director’s loan

The third and final method of taking money out of a limited company is in the form of a director’s loan. Essentially, this is a loan taken out of the business account and paid into a director’s personal account, or vice-versa. This is a fairly efficient method of withdrawing money for a temporary purpose.

There is a catch, however. 

Directors who use such a loan should take care not to withdraw too much, as this will lead to their account being “overdrawn”. This happens when a director takes out more money than they have put in overall. This isn’t much of a problem, provided the amount overdrawn is less than £10,000. However, anything over this amount will result in the overdrawn director paying additional personal tax liabilities. The company will also have to pay a 33.75% tax on the loan if it is not repaid in nine months and one day.

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Closing a solvent company

While the above methods are great for taking money out of a limited company, they are only useful when a company has a long-term future. As such, they are unsuitable for directors wishing to close down their company and withdraw the money in one go. In these cases, there are two main procedures that directors could use.

Members’ Voluntary Liquidation

The best method of closing a company with a large reserve of retained profits is normally with a Members’ Voluntary Liquidation (MVL). 

The MVL procedure offers directors an incredibly tax-efficient method of closing their company. It is done by appointing an insolvency practitioner (like Clarke Bell). The insolvency practitioner will then deal with liquidating the company – including identifying company assets and distributing them amongst the company’s shareholders. The liquidator will deal with the rules and regulations surrounding the formal process, including striking the company off the Companies House register, leaving directors to enjoy their realised profits.

The main reason to use this method of closing a company is its tax efficiency. As part of the MVL procedure, profits will be taxed under Capital Gains Tax rates, rather than Income Tax rates. This, on its own, leads to considerable savings, as CGT rates are much cheaper than their Income Tax counterparts. 

There are more savings to be had, however. 

Directors can apply for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief). If they are eligible (as most of our clients are), this relief brings down tax rates on profits even more, up to a lifetime limit of £1 million. 

The two savings combined make for an unparalleled level of tax efficiency…which is great news for the owners of the company.

Company dissolution

The MVL procedure is typically most effective for companies with assets over about £25,000. For companies with assets valued less than that, the better option might be company dissolution, via a process known as a company strike-off. 

Dissolution does not offer the same tax benefits as an MVL. Any profits realised as a result of dissolution will be taxed under Income Tax rates, causing a larger tax expense than with an MVL. However, although the savings are less than with an MVL, so is the cost. To initiate a company dissolution, directors must submit a DS01 form with Companies House, which costs £10 in paper format, or £8 if done through the online portal. 

So, in the right circumstances, dissolution is an exceedingly cost-effective method of closing a company.

If you decide to dissolve your company, you should ensure that you remove all registered assets before the end of the procedure. Any assets remaining within the company after it has been struck off will be considered “bona vacantia”, or without an owner. This will see ownership of said assets transferred to the Crown, which could unnecessarily negate the cost-effectiveness of a company dissolution.

How Clarke Bell can help you

If you do want to place your company through the MVL process – to get the considerable financial benefits which it provides – we can help you.

Clarke Bell have been helping company directors for more than 28 years. In that time, we have put thousands of companies through the liquidation process, and successfully distributed more than £500 million to company shareholders.

Contact us today for your free, no-obligation advice to see how we can help you.