How to Extract Money from a Limited Company?

There are several ways that a company can distribute profits to the directors/shareholders. Many company directors ask whether they should pay a dividend or salary. Payments can be made by salary, dividend, expenses and benefits, depending on the individual's personal circumstances. Hopefully your limited company is making money and you need to pay the company directors and shareholders an income. There are several ways to achieve this.

Salary

Most company directors are paid a salary and may also receive other expenses or benefits. Salary is typically paid through PAYE which is reported to HMRC through RTI. You can find several software solutions to assist you with reporting salary payments or use one of many online service providers.

Benefits and expenses

A director may also receive other benefits and expenses that were not included in the PAYE salary. These benefits are reported to HMRC with the P11d at the end of the year. These may include-

  • Health insurance
  • Company car
  • Some travel and entertainment expenses
  • Childcare
  • Accounting assistance with personal tax returns
  • Other gifts from the company or supplies that were directly related to the employment

Dividends

It's common for directors to also be shareholders. When this is true, the directors may also be paid in dividends (as shareholders) from the profits of the company. It is important to note that dividends can only be paid when the company has made a profit in the current year or previous year’s accounts.  Company directors have a duty to ensure the company can afford to pay a dividend.

The company directors make the decision to distribute the profit. They decide which class of share will receive a dividend and what value will be paid per share. The directors must hold a meeting to ‘declare’ the dividend being issued and keep a record of minutes of the meeting. This even applies where the company is managed by one shareholder who is also the director.

What paperwork do you need to issue a dividend?

The decision to issue a dividend should be recorded in a set of minutes. The company directors should call a meeting and record the decision in a set of meeting minutes. Even if there is a sole director that is also the shareholder a set of meeting minutes should be kept on record for HMRC. Otherwise HMRC may decide the payment was salary and not a dividend.

Whenever a dividend is paid a voucher must be issued to the shareholder showing:

  • The date the dividend was issued
  • The company name
  • The name of the shareholder receiving the dividend
  • The amount of the dividend being paid per share
  • The amount of the 'dividend tax credit'

A copy of the dividend voucher must be issued to the shareholders and a copy kept by the company for its own records.

The above methods, when used in combination, can be highly tax efficient and this is one of the many reasons why operating as a limited company can be advantageous. Being a sole trader does not offer you the same flexibility. If you would like to form a limited company, get started today and check if your company name is available.