Extracting Money from Your Company
You can extract money from your limited company through a mix of salary, dividends, pension contributions, and even company cars. Our guide explains how best to optimise your financial position and details the important tax considerations you need to know.
The profits generated by your business are considered the company’s assets rather than yours as an individual. When it comes to withdrawing funds, there are three main options at your disposal:
- Receiving a salary (PAYE).
- Taking dividends.
- Making pension contributions.
Typically, you can choose a combination of these methods to effectively manage your tax liabilities as an individual and a limited company.
This section of our guide delves into how you can extract money from your company through salaries, dividends, and pension contributions. By understanding and exploring these options, you can optimise your financial strategy and make informed decisions on efficiently utilising your company’s profits.
When it comes to extracting money from your limited company through a salary, you have various options. You can choose a full salary without dividends, a salary combined with dividends, or no salary at all, with all profits taken as dividends. We advise clients the most suitable approach for their circumstances based on their individual tax situation – but it is always up to you to decide.
Usually, the most tax-efficient option involves paying a minimal salary. You can then supplement your income by taking dividends. Dividends are advantageous because they are not subject to National Insurance contributions, and they are taxed at a different rate to income tax.
By carefully considering your salary and dividends combination, you can maximise your tax efficiency while ensuring a reliable income from your limited company.
At the end of a tax year, after making the necessary corporation tax payment, you have the option to handle the company’s profits in two ways: reinvesting them back into the company for future use or distributing them to shareholders, which includes yourself as the owner of the limited company, through dividends.
It’s worth noting that you have a Dividend Allowance, which represents the maximum amount of dividend income you can receive without incurring tax liabilities. Opting for a combination of low salary and dividends can be a highly tax-efficient choice.
To gain a deeper understanding of extracting funds through dividends, staying updated on the latest thresholds and regulations for dividend payments is essential.
Contributing to your pension is another option for extracting money from the company, helping plan for your future and providing you with tax advantages in the form of pension tax relief. By making pension payments directly from your business bank account to your pension pot, you can benefit from complete corporation tax relief up to your annual allowance. Every contribution you make to your pension scheme is eligible for tax relief based on your highest income tax rate.
Understanding the intricacies of pension payments and tax relief can be challenging. To assist you, our comprehensive Pension Tax Relief guide offers valuable insights. It provides an overview of pension tax relief, outlines eligibility criteria, and guides you through the process of making a claim.
By leveraging this resource, you can better understand pension tax relief and make informed decisions to optimise your retirement planning while maximising tax benefits.
Alongside salary, dividends, and pension contributions, purchasing a car is another way to extract money from the company. If you are considering purchasing a company car there are several factors to consider, which include:
- Car-associated costs: You should assess the overall costs associated with owning a car, such as purchase price, maintenance, insurance, and fuel expenses.
- Intended use of the car: Determine whether the car will be used exclusively for business purposes, for personal use, or a combination of both. This distinction will affect the tax treatment of the vehicle.
- Tax implications: Understand the tax liabilities and potential tax relief associated with owning a company car. Factors such as CO2 emissions, list price, and fuel type will influence the amount of tax payable.
- VAT considerations: Consider the role of VAT in your choice of vehicle. VAT treatment will vary depending on whether the car is for business or personal use and the type of financing option you choose.
- Buying or financing: Evaluate the pros and cons of purchasing a car outright versus leasing one or opting for another financing option. Each route has different financial implications and tax considerations.
When purchasing a company car through your limited company, it is crucial to consider the corporation tax and VAT obligations that arise from this transaction. Our Ultimate Guide to Business Car Finance Options outlines the various financing options available and provides insights into the associated tax implications, helping you optimise your choice and navigate the complexities of corporation tax and VAT regulations in relation to company cars.