Business owners put a lot of drive, passion and purpose behind their companies. They've traded the security of employment for a better life.
But at the end of the day, you still need to pay the bills. This blog post briefly looks at the options for a business owner to take out cash in a tax-efficient way from their limited company.
Key assumption: generally, you have to have sufficient profits and/or distributable reserves to take out cash from your company.
Short Term: Food on the Table
Assuming your company has enough profits, these options will reduce your corporation tax expense at your marginal rate, that is 19% (small companies) to 26.5% (medium companies) to 25% (large companies):
Director's Salary: the classic option. Typically, you would pay yourself up to £12,570 per year, which is the personal allowance and Class 1 Primary Threshold for employee national insurance. The company does incur employers national insurance of £479 but this is an allowable expense. For the small company, there is a corporation tax saving of £2,479.
Expenses: the effective option. always remember to reimburse yourself for any business expenses you have paid for on behalf of the company. This can include flat rate expenses, such as business mileage when you've used your own car or directly incurred expenses. Talk to your accountant to get a full list!
Benefits in Kind: the complex option. This is where the company provides non-cash benefits to its employees, such as a company car or gym membership. However, there is an offsetting personal tax liability for the director and employers national insurance costs for the company. There are also more compliance tasks, such as P11D reporting.
The following options don't attract a corporation tax saving:
Dividends: the other classic option. Paid out to the shareholders and subject to personal tax rates of 8.75% / 33.75% / 39.35%. You typically combine a low salary with high dividends for tax efficiency. The key thing is you do have control over the amount of dividends that you pay out, which gives good control over tax planning.
Director's Loan: the urgent option. In a pinch, you can borrow money from your company. But this is very much a short term solution. There are complex tax charges if you loan more than £10,000 from the Company. See the HMRC rules here.
Long Term: Building Wealth
If you can wait years into the future these options can have a bigger payoff. But they require more expertise and more planning.
Pension: the sensible option. Paying into a pension will reduce your corporation tax expense but you won't be able to access the benefits until you are close to retirement age. This is a prudent option the company has spare cash because business owners can neglect to save for the future.
Sale: the exit option. This realising the full value of your business via a disposal, either by selling it to new owners or shutting it down. You should be eligible for Business Asset Disposal Relief on any capital gains.
Invest: the interesting option. This sacrifices taking out cash today for taking out more cash tomorrow. Could you borrow to fund these opportunities? These options require careful consideration and you could explore:
Property
Capital assets for the company
Funding expansion by increasing staff capacity and marketing
Investing in another company
Next Steps for Taking Out Cash from My Company
The options for taking out cash range from straightforward and immediate to complex and long term. A good accountant will be able to advise you on the best option for you along with the business and tax implications.
Disclaimer
Boring but important. The tax rates and reliefs mentioned in this blog were correct at the time of posting (April 2024) and for this tax year (2024/25). It has not been updated for any future changes in tax law or HMRC practice. The contents of this blog have been produced as a helpful reference point and the information provided should be used as a guide only. You should discuss your specific circumstances directly with us before taking any action based on the information included in this blog.
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