Running your own company can be more tax-efficient than working through an umbrella company or sole proprietorship. Through it, you can get rewards for your work by maximising your take-home pay and taking advantage of the savings due to the number of withdrawing options available. You can extract money from your limited company through salary, dividends, pensions contribution, and director’s loans. These are great ways to save taxes while taking money out of your company. So it is important to understand the tax implications and timings before deciding the withdrawal method. Let’s find out how to get money out of a limited company without paying tax?
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How to Get Money Out of a Limited Company Without Paying Tax?
Typically, there are four tax-efficient ways to extract money from your limited company. Let’s explore them:
You can easily extract salary from your business to your personal account. Although you can’t take the majority of your income from your salary, but you can have a monthly pack packet without any tax implications. The tax-efficient way to extract money from your salary is to keep it a minimum below the personal allowance of £12,570. You will be required to deduct all the taxes, NICs, and employers NICs to pay HMRC.
Directors tend to be shareholders of the company to take dividends from the company in the form of any profits that a company makes. The company directors must declare dividends and the date of payment agreed at the board of meetings. As dividends can be tax-efficient ways to extract money from a limited company with a dividend allowance of up to £2,000.
Above this allowance, you need to pay as per your PAYE rate band. Bear in mind that the income earned from dividends can be added to any other income. The income from other sources and dividend income may push you to a higher tax band. However, with the dividend received, you don’t need to pay NICs.
Your company can contribute to your pension pot through which you can save a significant amount NI and tax, instead of making money through a salary. Note that you can’t receive this fund until you reach the retirement age. The allowance for pension contribution is £40,000 for persons earning up to £150,000 (or is it £240,000). This allowance decreases if you crossed the higher limit. The pensions allowance must not go above your total income from all sources.
You can take a director’s loan from a limited company to meet your short term personal needs. Extracting money via it can be a useful interest-free and low-cost funding source. Note that this loan is taxable if exceeds £10,000 or if you make interest payments to the company below the official rate set by HMRC. You need to pay back the loan before the year-end otherwise you’d be liable to pay an additional tax charge (S455) on the due balance.
Quick Sum Up
Hope you have learned different ways on how to get money out of a limited company without paying tax. Many business owners find extracting money from the limited company through the mix of salary and dividend more profitable, however, it depends on different factors and your personal circumstances. Working out the most tax-efficient way to take money out of your limited company can be complicated and time taking, therefore contact our qualified accountant to do the hassle for you.
Disclaimer: The information is intended to provide general information.