When you are running a limited company, it is much more complex than a sole trader or a partnership; there is more to think about and more paperwork to complete. Most importantly how do you get paid; how do you take your money out?
There are three main ways you can take money out of a limited company. To understand this, first we need to understand the roles involved in a limited company. There are two peoples involved in a Ltd.
- Director – people who run the business and can be any number starting from a minimum of one
- Shareholder – people who own the business in a limited company by shares which is the usual small business format.
Generally, when it is a small business or you have just incorporated your sole trader business into a limited, you are the only director/shareholder, so you wear both these hats!
- Salary (and expenses and benefits): we recommend talking to your accountant about this. This is set up through payroll. As a Director you will work for the Limited Company (remember the Ltd is a separate entity in its own right – like a separate person)
- First register the company as an employer with HMRC
- Decide on the salary amount. Depending on the amount of salary you decide on, you may pay Tax and National insurance contributions from your salary and your employer may pay employers contributions.
- Decide on the pay frequency – monthly, weekly etc.
- Decide on any expenses which will be paid and how these will be recorded e.g. mileage on a mileage form each month
- Will there be any benefits such as medical expenses covered? If so a P11d may be needed
- Make sure a contract of employment is in place
- Directors Loan Account: this is when a director has either loaned money or given/sold items to the Company for which it owes him the money. Or the opposite can be true – the director has taken money out of the company which is not salary or dividends. A detailed record must be kept of all money put in and taken out. If the director’s loan account is overdrawn at the end of the company’s tax year, there are rules as to how this should be treated. If the director owes more than £10,000 at the Company year end and this is not repaid within 9 months (the accounts deadline) then 25% of the amount must be paid as tax and declared on a CT600A form with the tax return. If this amount owed is repaid in the future, then you can reclaim the 25% tax paid. You need to speak to your accountant about this as the rules are quite complex.
- Dividends: this is a payment made by the company on each share held. The basic calculation is net profit less corporation tax, equals profit available to distribute as a dividend. E.g.
less tax at 19%
Available for dividends
If there are 1,000 shares issued in the company, then the dividend is £8.10 per share.
There are rules to dividends
- The company cannot pay out more in dividends than the profits it has available from current and previous years
- All shareholders receive a dividend equivalent to how many shares they hold
- The correct paperwork must be in place to pay a dividend
- Dividend Paperwork: before a dividend is paid firstly you must hold a directors’ meeting to ‘declare’ the dividend (this can be anywhere all the directors can meet – if one director then you have even more flexibility!) Then you need
- Meeting Minutes – Keep minutes of the meeting, (even if you are the only director) showing, the date, meeting place, what dividend was declared and attendees in the meeting.
- Prepare a dividend voucher which shows, the Date, Company name, Shareholder’s name, Dividend amount and Tax credit amount.
- Dividend and Tax: as of 1st April 2016, the dividend tax regime changed. As of this date everyone has a £5000 dividend allowance, free of tax, no matter what your non-dividend income is. This applies to the 2016/17 and 2017/18 tax periods. In the spring 2017 budget, the allowance was reduced to a £2,000 dividend allowance starting from the 2018/19 tax period. You will pay tax on any dividends you receive over the allowance at the following rates:
- 5% on dividend income within the basic rate band
- 5% on dividend income within the higher rate band
- 1% on dividend income within the additional rate band
If you would like any further information on anything covered in this article, please feel free to contact us at ZATRS – email@example.com