Article relevant to the tax year 2018/19.
Extracting cash out of a limited company
Other tax-free non-cash benefits of using limited companies
Our sole focus of this article is to show you ways of extracting cash out of a limited company. Clearly, we need to avoid tax as much as possible.
Taking wages from a limited company
We will assume that you receive no other form of income in your personal name. You can take £8,424 (18/19 tax year). You will now need to run a payroll system and notify HMRC that you are now an employer. This, even though you are not paying tax / national insurance. If you take more than £116 per week (18/19) or its equivalent. You can do this by completing the HMRC form.
Taking dividends from a limited company
Dividends can only be paid out of post-tax profits or retained earnings. This is profits from previous years not taken from the business or used by the business. That is, if they relate to your own limited company. If your business has made a loss in a year and has no retained earnings, there are no dividends able to be taken.
The first £2,000 dividends are tax-free irrespective of how much money you earn (for 18/19 tax year and beyond). Any dividends in excess of £2,000 will be taxed. As long as you remain a basic rate taxpayer (ie when you add together dividends and salary and any other income landing in your personal name) at 7.5%. A basic rate taxpayer is an individual whose total income is no greater than £46,350 in 18/19 tax year. If you take dividends in excess of £2,000 and are a high rate tax payer then you will pay 32.5% dividend tax. 38.1% dividend tax will be paid as an additional rate taxpayer.
If you wish to release “interim” dividends to the shareholders to take full advantage of the dividend allowance. In a particular tax year, you will need to make the money transaction (ie move money from the limited company to the director’s personal bank accounts). You will then prepare an “interim” dividend certificate per director receiving the dividend. This shows the value of dividend, which shareholders receive it. It will also show the date and then signs it as a director of the company.
Please remember that you can only pay a dividend at an interim date, if at that date your accounts showed your business to be in profit. In addition, the value which means the dividend taken is no more than 81% of the profit. I would recommend taking a pdf of the P&L on this date and retaining with your interim certificate should you ever be asked to prove at the time the dividend was taken your company was in profit.
What documents are required for dividend distributions?
Dividend Certificates. The Director of the company must write up a dividend voucher showing the:
- Company name
- Names of the shareholders being paid a dividend
- Amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.
When you take a salary above a certain value. The equivalent of the Lower Earnings Limit for national insurance purposes. This is £116 for 18/19. The company paying this salary needs to register with the HMRC PAYE team (at least 2 weeks in advance of the first payment of salary by the company) as an employer and then submit monthly reports to HMRC PAYE on the amount of salary paid.
Paying money into your private pension
Pension contributions: The company can contribute to the directors/employees pension. You can have a personal pension scheme, which may then invest in commercial properties. More may be read in our article or NEST a workplace pension. Any money that the company pays into a pension is a cost and therefore reduces the profit of the business (ie is tax deductible).
Key person insurance paid by your limited company
Key person insurance: Your company may also pay life assurance as “keyman insurance” that pays out a lump sum to a beneficiary/trust. This is not a benefit in kind for the employee – See government website for details.
Medical bills paid by your limited company
Employers can pay up to £500 medical bills on behalf of their employees to get them back to work if they have been sick for at least 28 consecutive days. Employers can also pay for Periodic medical checks or health screening each year without this becoming a benefit in kind. The company can also pay for eye tests (including glasses and contact lenses if used for VDU work), See government website for details.
Other staff perks paid by the limited company
Your company can pay up to £150 per person per annum for staff celebrations. Examples being a Christmas party. Please note that the total of £150 cannot be exceeded. If you do spend more than a total of £150 even where you have several events then the entire amount becomes taxable – Government website
You can also provide directors and employees with discounts to restaurants, high street shopping, gyms etc via a company called Perkbox. See their website for details
As a director, you can also receive £300 gift vouchers from your limited company but they cannot be exchangeable into cash. The types of gift vouchers are high street shops and restaurants. See government website for more details. This tax-free benefit may also be used in conjunction with Perkbox where discounts to high street shops and restaurants are also provided.
As you can see that there are many ways of extracting cash out of a limited company. Some of the methods are non-cash benefits but are still attractive.
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