There are 4 keys ways for a director to take money from a limited company, paying directors effectively involves balancing tax efficiency and legal compliance. Here are the key methods:

  1. Salary: A regular salary is essential to ensure National Insurance contributions and pension entitlements. However, too high a salary could lead to higher tax rates.
  2. Dividends: Paying directors through dividends is tax efficient as dividends are taxed at a lower rate than salaries. Dividends can only be paid out of company profits, so this option depends on the financial health of the business.
  3. Pension Contributions: Companies can make pension contributions on behalf of directors. This method is highly tax efficient, allowing the company to claim a tax deduction while providing future financial security for the director.
  4. Benefits in Kind: Directors can also receive perks like company cars, healthcare, or other non-cash benefits, although these may come with some tax implications.

The best approach is typically a mix of salary, dividends, and pension contributions, ensuring directors are compensated while maximising tax efficiency. Always consult an accountant for tailored advice!

Director to take money from a limited company – Salary

A regular salary is essential to ensure National Insurance contributions and pension entitlements. However, too high a salary could lead to higher tax rates.

A director’s salary is taxed as employment income, so you’ll need to pay income tax and National Insurance (both employer and employee contributions). To minimise tax, many directors choose to pay themselves a salary just above the National Insurance threshold, which also counts towards pension contributions.

Director to take money from a limited company – Dividends

  1. Check for Profit: Ensure your company has enough retained profit (after tax) to cover the dividend payment.
  2. Hold a Board Meeting: Even if you’re the only director, you must formally declare the dividend in a board meeting and document it.
  3. Issue Dividend Vouchers: Provide shareholders with a dividend voucher detailing the amount paid, the company name, and the date.
  4. Make the Payment: You can pay dividends via bank transfer or any method that suits your company’s cash flow.

Remember, dividends must only be paid from available profits. Paying dividends when profits aren’t sufficient can lead to legal issues, so it’s essential to keep an accurate account of your company’s financials. Consult your accountant to ensure compliance.

Director to take money from a limited company – Pension Contributions

Making pension contributions as a company director can be a smart way to save for retirement while benefiting from tax efficiencies. Here are the key implications:

  1. Tax Relief: Employer pension contributions are considered a business expense, meaning they can be deducted from your company’s pre-tax profits, reducing the corporation tax bill.
  2. No National Insurance: Unlike salary, pension contributions are not subject to National Insurance for either the employer or the employee, offering further savings.
  3. Annual Allowance: There’s an annual pension contribution limit of £60,000 per year (2024/25). Contributions above this limit may incur tax charges.
  4. Long-term Investment: Pension contributions are a great long-term investment, but keep in mind you won’t be able to access your pension until you’re 55 (rising to 57 in 2028).

Director pension contributions are an excellent way to invest in your future while offering tax advantages to your limited company. Always consult your accountant to ensure you maximize benefits and remain compliant with pension rules.

Director to take money from a limited company – Benefits in Kind

Benefits in kind (BIK) are non-cash perks provided to directors or employees by their company, such as company cars, private medical insurance, or loans. While they offer extra advantages, they come with tax implications that are important to understand.

  1. Taxable Benefits: Most benefits in kind are considered taxable income for the director, and they must be reported on a P11D form. The director may need to pay income tax on the value of the benefit.
  2. National Insurance Contributions (NICs): Employers are also required to pay Class 1A National Insurance on the value of the benefits provided.
  3. Common BIKs: Examples include company cars, interest-free loans, health insurance, and even certain expenses like housing. Each of these has specific tax rules and valuation methods.
  4. Mitigating Tax: Some benefits, like mobile phones or contributions to pensions, are either tax-free or have reduced tax rates, making them more cost-effective for both the company and the director.

Understanding the tax implications of benefits in kind is essential to ensuring compliance while taking advantage of perks efficiently. Consulting a tax professional will help you navigate these rules and maximise your benefits.

Handy Links

National Insurance for company directors

director expenses and benefits