Limited companies are owned by shareholders and managed by directors.
Very often, especially in the case of smaller companies, the owners and managers (shareholders and directors) are the same persons. Unfortunately, each has separate roles and responsibilities. For example, as a director of a limited company you must:
- follow the company’s rules, shown in its articles of association.
- keep company records and report changes.
- file your accounts and your Company Tax Return
- tell other shareholders if you might personally benefit from a transaction the company makes.
- pay Corporation Tax.
You can hire other people to manage some of these things day-to-day (for example, an accountant) but you are still legally responsible for your company’s records, accounts and performance.
Also, you may be fined, prosecuted or disqualified if you do not meet your responsibilities as a director
Taking money out of a limited company
Directors have a few options when considering how they can withdraw money from their company. For example, they can receive a salary, charge rent to the company if their company has the use of personal assets or charge interest if a director lends money to its company.
Directors who own shares in their company or other shareholders have one income producing option, to take a dividend.
A dividend is a payment made to shareholders out of a company’s taxed earnings. Depending on the level of dividends received, shareholders will pay:
- No additional tax on dividends received up to £2,000 a year.
- Dividends that form part of the basic rate band will be charged a hybrid tax rate of 7.5%.
- Dividends that form part of the higher rate band will be charged at 32.5%.
- Dividends that form part of the additional rate band will be charged at 38.1%.
Because dividends are a return to shareholders they are not treated as earnings from employment and consequently, no National Insurance arises. For this reason, there is a tendency for director/shareholders to minimise salary payments and maximise dividend payments.
Planning is key
However, it is rare for the tax position of individuals to be the same and for this reason, working out the most efficient way to withdraw funds from a company is paramount. It is not just a question of considering the strategy that produces the lowest tax bill. For instance, if salaries are to be minimised Living Wage rates and entitlement to benefits – particularly the State Pension – may need to be considered.
If it is some since you consider your options, please call so we can help you create the optimum fit for your circumstances.