Extracting profits from a company

You’ve put the hard work into running your limited company – but when it’s time to reap the rewards, you’ll need to make sure you do it the right way.

Extracting money from your company isn’t as simple as taking what it earns. Your company is separate from you, with its own finances, and as a director, you’re technically its employee.

This means you have a few options when it comes to extracting profits: taking a salary, dividends, or other expenses and benefits.

Salary

As a limited company director, you can pay yourself a salary from the company.

You’ll need to pay income tax on this above the income tax personal allowance, which stands at £12,570 in 2022/23. This is charged at 20%, 40% or 45% depending on your income tax band.

You’ll also pay National Insurance on your salary above the primary threshold. This stands at £9,568, but following announcements in the 2022 Spring Statement, it’s set to align with the personal allowance at £12,570 from 6 July 2022.

Many directors pay themselves a salary under these thresholds, and top it up with dividends (more on these later).

You’ll need to be careful, however, that you don’t make yourself ineligible for state benefits. These are available to those with a salary above the lower earnings limit, which currently stands at £6,396.

A benefit of paying yourself a salary is that this counts as an allowable expense for your company – meaning you can deduct it before corporation tax is charged.

Dividends

Dividends are a payment made to shareholders out of the company’s profits.

These are also covered by the personal allowance, as well as a dividend allowance of £2,000.

If you have dividend income outside of these thresholds, you’ll pay tax on it – but the rates for dividends are slightly lower than the standard income tax rates, at 8.75% for basic-rate taxpayers, 33.75% for the higher rate, and 39.35% for the additional rate.

To pay a dividend, you’ll need to hold a directors’ meeting to declare it and keep minutes of this meeting. This is the case even if you’re the company’s only director.

You can only pay a dividend when your company makes a profit – it’s illegal to pay out more in dividends from your company than its available profit from current and previous financial years.

Pension contributions

Besides your salary, there are other expenses and benefits your company can pay to you.

Pension contributions are a particularly popular option. They’re a tax-efficient way for you to save for the future, and will give you tax relief on contributions of up to £40,000 a year.

Plus, they’re an allowable expense for your company, so they can help to reduce your corporation tax bill.

Loans

If you take money from your company that’s not a salary, dividend or expense, and it’s not money you’ve previously paid into the company yourself, this counts as a director’s loan.

You’ll need to keep a record of these, and you may have other tax and legal responsibilities depending on the size of the loan, how soon you repay it, and other circumstances.

It’s important to get proper advice on these before borrowing any money from your company, to avoid a surprise tax bill.

Talk to us about paying yourself from your limited company.