5 Different ways to take money out of a limited company for your own use

When it comes to the money you’ve earned through your own limited company, it’s not as straightforward as using it for whatever purposes as you would like. As a limited company is its own legal entity, there is also a legal requirement that it holds its own business bank accounts for money to be kept separate from personal accounts. This fundamentally means that funds need to be extracted first before it can be used for your own personal needs.

This article has been written in mind for the solo company directors so that you can understand the different options available when it comes to extracting funds from your own limited company and the tax implications that are likely to arise as a result. This will allow you to determine the best combination for your own individual needs whether it’s personal financial goals or business growth goals.

We’ll go through:

1. Taking a salary and entitlement to statutory pay
2. Issuing dividends
3. Receiving benefits-in-kinds
4. Enrolling onto a workplace pension scheme
5. Taking out a director’s loan

1. Access money from your company by paying yourself a director’s salary

In the eyes of the law, directors of limited companies are seen as employees. This means you are entitled to receive a salary if you wish, but it is not mandatory. Indeed, many company directors forgo a director’s salary, especially during the company’s start-up period when earnings may be low to start off with.

Any director’s salary paid must be administered through a registered PAYE scheme with HMRC. You will then need to pay income tax on the salary received which will be subject to the following 2024/25 tax year rates: 

• The annual personal tax-free allowance of £12,570
• Basic rate tax at 20% on salaries between £12,571 to £50,270
• Higher rate tax at 40% on salaries from £50,271 up to £125,140
• Additional rate tax at 45% on salaries of £125,141 and over

What are the advantages of paying a director’s salary?

For most small businesses, there will be a fine balance between how much you should pay yourself as a limited company director in salaries and how much you should take out in dividends. Our article on the difference between a director’s salary and dividends explains why.  However, generally the advantages of paying a director’s salary include:

• Paying a director’s salary is tax-deductible which means it reduces your company’s profits for your corporation tax bill.
• So long as you are receiving a salary that meets the national minimum wage requirements, you’ll be able to retain eligibility to receive maternity benefits.
• Where your salary is at least £10,000 per year, you’ll be entitled to be enrolled onto a workplace pension scheme which means your company will need to contribute towards your pension pot, but this is also tax-deductible against your company tax bill.
• Receiving a regular salary can help make applying for mortgages and taking out insurance policies such as critical illness cover easier.
• You remain entitled to receive a salary even where your company is not profit-making.  

What are the disadvantages of paying a director’s salary?

There are two main drawbacks of paying a director’s salary which is often what prevents many directors from taking large salaries. These are due to:

• The requirement for both you as the individual and your company to make National Insurance (NI) contributions based on the amount of salary you receive.
• The fact that salaries are subject to income tax which are charged at a higher rate of tax compared to the dividend tax rate.

2. Extract profits from your business by paying yourself dividends

Where being a director means you are an employee of your limited company and therefore entitled to receive a salary, being a shareholder of a company means you are an owner of your limited company and therefore entitled to receive dividends.

If you issue yourself dividends then these are not taxed at source and so must be declared via an annual self assessment tax return. Although dividends follow the income tax bands (described above), they are subject to their own tax rate. For the tax year 2024/25 the dividend tax rates are:

• An annual tax-free dividend allowance of £500
• Basic rate taxpayers are charged 8.75% on dividends
• Higher rate taxpayers are charged 33.75% on dividends
• Additional rate taxpayers are charged 39.35% on dividends

What are the benefits of paying yourself dividends?

Paying yourself dividends is often a popular decision amongst most directors due to the favourable tax treatment and flexibility, which includes:

• Dividends are charged at a lower tax rate of income tax than salaries which means you can take home more money.
• Additionally, receipt of dividend payments is not liable to NI unlike with salaries.
• Dividends can be issued as often and as many times as you like unlike salaries which are usually paid periodically.
• You are free to issue as much dividends as you would like so long as you comply with the dividend rules.
• Issuing regular dividends is seen as attractive to potential investors where you may be seeking funding and investment for your company.

What are the drawbacks to paying yourself dividends from your own limited company?

Despite the appealing benefits outlined above, there are strict rules surrounding the issuance of dividends which can be restrictive:

• Dividends can only be paid from a company’s profits. This means that it is not tax-deductible as with salaries and can only be issued if there is surplus in the company bank accounts once corporation tax and other liabilities have been paid.
• If there are other shareholders in your company, then dividends can only be paid out where a majority vote agrees to do so.
• Dividends are not considered as part of relevant UK earnings, so this means that the amount you’re allowed to pay into a pension scheme each year and receive tax relief on does not go up even where you receive a large sum in dividends.
• Similar to a salary, there are still formal procedures to follow when issuing dividends which can be seen as extra administrative work.

3. Use money from a limited company to pay for benefits-in-kind as part of your remuneration package

Aside from taking a salary and receiving dividends, you can also choose to remunerate yourself as a director of your own limited company through other means. One option is to receive benefits paid for by your limited company. This is perfectly legal so long as you comply with benefits-in-kind (BIK) rules.

Some benefits will attract income tax for you as an individual as well as NI for your company. However, BIKSs are still popular amongst both employers and employees because it usually means being able to receive a benefit which has a high monetary value for less than what you might have to pay if you were to purchase it outright for yourself. One common example of this is an electric car; however the same cannot be said to be true of petrol and diesel vehicles so be sure to understand the different tax rules on different BIKs.

There are some BIKs which are tax-free altogether, however these can be difficult to claim if you are the sole director of your company with no other directors or employees. For example, staff parties or trivial benefits such as free tea and coffee is unlikely to be considered as a company benefit but for your own personal use instead, and therefore would not be tax-deductible.

Nevertheless, there are still certain benefits which you can take advantage of even if you are the only employee of your company which we’ll now go onto in the section below.

4. An efficient way to extract money from the company is to enrol onto a workplace pension scheme

Company contributions to a workplace pension scheme are considered a BIK, however it is tax-free and can be offered even where you are the only employee of your company. Nevertheless, it is often overlooked by many, yet is one of the most effective tax-saving strategies. This is because, as an individual, you are limited to how much you can contribute into a pension plan depending on your annual salary (known as relevant UK earnings which we’ve mentioned above). If you’re taking a relatively small salary, then this can greatly restrict how much you can pay into your pension pot. However, companies are not subject to this rule, and instead only the annual pension allowance applies. For the tax year 2024/25 this is £60,000 per year.

What’s more, when your company pays towards your workplace pension scheme this is considered as a tax-deductible business expense and therefore will reduce the amount of corporation tax your company is due to pay. Your company is able to pay pension contributions on your behalf regardless of whether there are surplus profits to do so unlike with dividends. For both yourself as an individual as well as your limited company there is no NI to pay and for you individually there is no income tax to pay.

The one significant drawback of extracting funds from your limited company in this manner is that money only becomes accessible to you once you have reached pension age. For many, this may make it a less appealing option to utilise, yet there’s no doubt that it remains a highly tax efficient solution to saving for retirement and later years. For those in the higher and additional rate income tax bands, or for those who do not desperately need the income, it should at least be seriously considered as part of an overall strategy to extract profits from a limited company.

5. Another method of taking money out of your business is by taking out a director’s loan

Where you withdraw any money from your limited company that is not by way of salary, dividends, or business expenses (BIKs and pension contributions), it is considered to be a director’s loan. This method of withdrawing money cannot be relied upon as a regular means to accessing cash for your personal use because the legislation around director’s loans is strict and can be costly.

One benefit of running your own business through a limited company is the potential ability to easily access tax-free short-term loans. As a director of your own limited company, you can access funds from your business (where available) by means of a director’s loan. Loans of up to £10,000 are tax-free to both you and your company so long as it is repaid within 9 months and 1 day of your company’s year-end date.

If the loan is not repaid in full within this time period, your company faces a section 455 charge which is a corporation tax penalty of 33.75% (much higher than the standard rate of corporation tax at 25% and even more so when compared to the small profits rate of 19%). Any loans which exceed £10,000 must be declared on your personal tax return and your company is subject to pay employer’s NI on the amount. Furthermore, if you are not charged interest on the loan at the official rate of interest (2.25% for the tax year 2024/25) then this becomes a BIK which incurs NI for your company at 13.8%.

However, where your director’s loan remains within the £10,000 limit and is repaid within 9 months and 1 day of your company’s year-end, then this can be accessed tax-free and free of interest. You should note that you will not be able to take out another loan until after 30 days of when your last director’s loan has been repaid. Not only that, but even by following the 30-day rule, HMRC may challenge your director’s loans if they are taken out too frequently and assert that they should be subject to tax. For this reason, you should only consider taking out a director’s loan as a last resort and for exceptional circumstances.

Have more questions on how money can be withdrawn from your limited company?

If you’re looking for tax efficient ways to take money out of your limited company, then why not speak to one of our expert tax accountants who can ensure you are doing so compliantly. On the other hand, you may also want to consider leaving money in the company for future use to grow your business. Our team can help you build a plan around your needs and goals, with a focus on minimising potential tax liabilities such as income tax and national insurance to corporation tax and dividend tax. Use our online contact form to book a consultation.