How do I take money out of my Limited Company?
Article updated August 2020
For many years, the majority of owner-managed limited companies have used dividends as their main method of drawing income from the business, which allows the company and the individuals within it to minimise their overall tax liabilities. A ‘dividend’ is the distribution of profits made by a company to its shareholders.
Can dividends be paid to Directors?
Directors are responsible for the management of the company and owe responsibility to the shareholders.
Shareholders are the beneficial owners of the company. In many businesses, the shareholder and the director are the same person and therefore the Directors receive dividends in this instance.
Shareholders receive dividends in proportion to their shareholdings, whereas a Director is paid wages through the PAYE system.
How are they paid?
To pay dividends to all shareholders, you must hold a directors’ meeting to declare the dividend and keep minutes of the meeting. You must also complete the right paperwork. Given the crackdown on tax avoidance issues, HMRC can make an assumption that companies who don’t complete the right paperwork when paying dividends are merely disguising salary payments or loans.
What are the risks of doing it wrong?
If the necessary documentation and methods for voting dividends are not followed, HMRC could argue that the dividend payment wasn’t a dividend to a shareholder at all but was instead a loan to a director. Even worse, it could be considered remuneration subject to PAYE and National Insurance. As such this could lead to the following tax problems:
If it gets treated as a loan
Amounts exceeding £10,000 will be treated as a taxable benefit in kind, meaning that the individual will pay tax, and the company will have to pay Class 1A National Insurance. Worse, still, if the ‘loan’ is still outstanding nine months after the end of the accounting year, a temporary tax charge is levied on the company at the rate of 32.5% of the outstanding loan at that point and is not refunded until a year after the loan is repaid.
If it gets treated as remuneration
Drawings treated as a remuneration will become subject to Income Tax and National Insurance, with the company also subject to Employer’s National Insurance on the deemed gross salary. In theory, HMRC can attack either the company or the individual for the payment of the Income Tax and National Insurance that should have been suffered by the individual.
The taxpayer can be taxed in a less-advantageous year
Without the correct paperwork, some tax inspectors are treating the date of the dividend as the date that the accounts are approved. This can lead to the taxpayer being taxed on dividends in a year of higher income than planned, resulting in additional Income Tax becoming payable.
Hardship if the dividends have to be repaid
If the company gets into financial difficulties and there isn’t satisfactory evidence that sufficient profits were available to draw, this could be treated as a loan and therefore will need to be repaid to the company. Whilst this isn’t a tax issue, it’s really important as this situation could create considerable hardship to the individuals involved.
So the question is – how do you go about doing it right?
We’ve made it super simple for you with a standard template. This document will show you how to prepare your dividends documentation and advising you through the process. To request your free copy, email email@example.com.
Many of our clients prefer us to undertake a regular review of their management figures, prior to the payment of any dividends, after which we can prepare the paperwork ready for your signature. Such a review will carry a small additional fee, but may enable you to time the payment of such dividends to avoid unnecessary tax charges and thus may pay for itself.
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