Any profit your limited company makes is subject to Corporation Tax at the rate of 19% from 1st April 2017. The remaining profits after deducting this tax are available to be distributed to you as the director/shareholder.
There are several ways of extracting funds from your company, each of which have different implications from a tax perspective. The money available for you to draw as the director/shareholder is essentially the profits earned by the company after deducting allowable expenses paid for by the company and tax liabilities due to be paid by the company such as VAT, PAYE& Corporation Tax.
As a director of your limited company you are entitled to take a Directors' Fee (which for tax purposes is similar to drawing a salary).
For 2019/20 the recommended director’s fee for most people is £719.30 per month- if you have a number of employees then a director’s fee of £1,041.60 per month is recommended to take advantage of the Employment Allowance. This ensures that the utilise your personal allowance therefore saving the maximum amount of tax, the NIC contributions paid in the tax year count towards your state pension and gives rise to claims to Job Seekers Allowance and other associated benefits.
As long as you are not captured by the IR35 legislation, as a shareholder of the company you are able to draw dividends. Drawing Dividends is generally more tax efficient than taking a Directors' Fee due to the lack of National Insurance on dividends. Further guidance on Dividends can be found in the Personal Tax section.
If you decide to close your limited company due to retirement or any other commercial reason, there is a tax efficient way in which you can extract the remaining profits from the business bank account.
This is referred to as a capital distribution, as it is taxed in the same way as a capital gain. This is more tax efficient for a Higher Rate Tax payer than a dividend, as the rate of Capital Gains Tax is lower than the rate at Income Tax for a Higher Rate Tax payer. If you wish to draw funds in this manner, then you have to have a commercial reason for closing the company and prior clearance has to be obtained from HMRC.
Pension contributions can be paid both personally and by the company. As well as providing the benefit of saving for your retirement, pension contributions are very tax efficient. Pension payments made by you as an employee are paid net of tax to the pension scheme and can reduce any potential Higher Rate Tax that may be incurred.
Pension payments made by the company reduce the amount of profit the company pays Corporation Tax on as long as the company has retained profit to make the contributions. The company must have met all its other tax liabilities such as PAYE, VAT etc.
