Don't withdraw money willy-nilly from your company. There will be tax implications (and no one wants to pay unnecessary tax).
We will go through how to withdraw money for Sole Traders & Self Employment, Partnerships and Limited Companies, as well as the most effective and efficient ways to do so. Doing this will ensure the minimum amount of tax is paid.
Sole Traders & Self Employment
This is an easy one.
Withdraw what you want - within reason.
As you're self employed and going it alone, you can withdraw what you want from your company as you are the company.
But, bear in mind that you will be have to pay tax on your profits. It's best to open a savings account that is purely used for paying tax, plus you'll earn interest on your savings throughout the year. BONUS! Whilst we're talking about bank accounts, have a separate business bank account to monitor income and expenses. This will make your bookkeeping a doddle, and easier for your accountant when your Self Assessment is due.
Get yourself familiar with the table below to estimate what you should save:
This is very similar to Sole Traders and Self Employment.
However, the profits are distributed based on the proportion of ownership amongst the partners.
Partners can withdraw money from their company like a Sole Trader would above, and each partner is responsible for the taxes on their share of the profits. The table above is to be used for Sole Traders and Self Employment only.
This is where things become a little trickier.
You need to remember that a limited company is separate from its directors. If you withdraw more than £10,000 from your limited company, it is considered a loan where your company is loaning you the money you withdraw. This has high tax implications and, with any loan, it's expected to be paid back. You will be liable for 32.5% tax on the loan if it isn't paid back within nine months and one day after the companies year end.
As a director, there are different thresholds for National Insurance Contributions and Minimum Wage legislation - simply, you can take a salary without, yourself and the company, having to pay any deductions. As of the 2020/21 tax year, this is £8,788 per annum or £732 per month. With this, you have to register the limited company for PAYE and you will have to run a monthly payroll (your accountant can do this for you).
Obviously this amount is a small amount and, whilst it is a liveable amount, isn’t enough. That’s where the dividends come in.
Dividends are a share of the companies profits that are distributed to its shareholders (owners). The tax on dividends is far less than that of an overdrawn directors loan account and taking a salary, plus the first £2,000 of dividends are tax free. BONUS! It is the director’s personal responsibility to pay the tax on their dividends and this is done through Self Assessment. It is important to note that dividends can only be taken if there is an availability for them - again, your accountant will let you know if you can take a dividend.
Dividend tax rates: (apply after the £12,500 personal allowance is used)
Worked Example: (minimum salary and £45,000 dividend)
If the above was being put through a payroll, taxes would be £13,950.96. If it were considered a directors loan it would have to be paid back to the company, and if not total tax would be £17,481.10.
It is recommend that you talk with your accountant on the most effective ways to pay yourself, and to see if you are able to take a dividend. There are certain disadvantes to this method, the main one being that you can’t pay yourself a dividend if you're making losses and run into cash flow issues.
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