Running a limited company gives business owners several ways of taking money from their business.
Salary and dividends are the most familiar, but they are not the only possibilities. The tax consequences can also be quite different, which means simply transferring money from the company bank account when you need it is rarely the best approach.
Taking a salary
A director can receive a salary through the company's payroll.
Provided the salary is incurred wholly and exclusively for the purposes of the company's trade, it will generally be deductible when calculating taxable profits. Depending upon the amount paid, however, Income Tax and National Insurance contributions may arise.
The appropriate salary level will depend upon individual circumstances, so there is no single figure that is right for every company director.
Paying dividends
Shareholders may also receive dividends.
Unlike salary, dividends are not deducted when calculating the company's Corporation Tax liability. They are distributions of profits that have already been earned by the company.
Importantly, a company must have sufficient profits available for distribution before paying a dividend.
The necessary company procedures should also be followed and appropriate records maintained. Regularly transferring money from the company bank account and subsequently describing those payments as dividends can cause problems if insufficient distributable profits were available.
The shareholder may also have Income Tax to pay on dividends received.
What are the other options?
Depending upon the circumstances, there may be other ways of extracting value from the company.
For example, the company might make employer contributions to a director's pension. These can be particularly attractive where the director does not require all the available funds for immediate personal expenditure, although pension contribution rules and allowances need to be considered.
The company can also reimburse legitimate business expenses paid personally by a director.
If a director previously lent money to the company, repayment of that loan would normally be treated differently from salary or dividends.
Watch the director's loan account
Problems can arise when directors withdraw money without deciding what those payments represent.
If the amounts cannot properly be treated as salary, dividends, expenses or repayment of money previously introduced, they may create an overdrawn director's loan account.
This can have tax consequences for both the company and director, particularly if the balance remains outstanding.
Watch out, changes underway
The rules governing how shareholders take money and other value from companies may also be changing. The government is currently consulting on modernising the taxation of company distributions, an area where much of the legislation has remained substantially unchanged since 1965. The review is considering, among other things, the distinction between income and capital payments to shareholders, reductions and repayments of share capital, company purchases of own shares, demergers, the interaction between distributions and loans to shareholders, and the Transactions in Securities anti-avoidance rules. It also considers whether the tax treatment of distributions from non-UK companies should be brought more closely into line with that applying to UK companies. The consultation is particularly relevant to owner-managed and other close companies and closes on 14 September 2026. No final changes have yet been decided, but company owners considering significant withdrawals, share reorganisations or capital transactions should take advice before acting.
Review your strategy
The most appropriate way to take money from a company depends upon several factors, including profits, other personal income, cash requirements, pension plans and the circumstances of other shareholders.
It is therefore worth reviewing the position rather than automatically repeating whatever was done last year.