Is cash earned by my company my money?
So you have set up your limited company and are busy locuming. Your earning good money and you notice that your cash figure is building up. You decide to treat yourself and decide to buy a new car, go on a holiday, etc. You might think that you’re free to dip into the company’s profits as you see fit; after all it is your company. However it is NOT, and this misunderstanding can land you in a lot of trouble.
Limited companies are a legal entity in their own right, which basically means that the company’s assets and profits belong to the company, not you, the business owner. It is this differentiation which enforced HMRC to stop you simply taking money out of the business like a sole trader, whose personal and business assets are one and the same.
Does it mean you can not take money out of the company? Yes you can, it can only be taken out of a limited company in one of three ways:
1. Director’s salary, expenses and benefits
The most familiar method of taking money out of a limited company is for you to pay yourself a salary. You would have to register with HMRC for PAYE and will also have to pay National Insurance Contributions on your earnings. Even if the only employee is you as a Director, you still have to register as an Employer.
Most company directors choose to take a very small salary, up to the National Insurance Contributions threshold of £8,060, and instead take the lion’s share of their pay in dividends.
At this level of pay you qualify for the state pension and benefit entitlements, but do not incur a personal tax liability.
You will be responsible for paying any Tax and National Insurance contributions to HMRC, and will need to ensure that a Full Payment submission is sent to HMRC after each pay-run.
2. Directors loan
A director’s loan is another efficient way to take money out of a company, although it can be fraught with hazards if the process is not handled correctly. If you take money out of a business and it is not a salary or a dividend, you have what is known as a director’s loan.
All transactions in a director’s loan account have to be accounted for in the company’s balance sheet, and may also have to be included in the company tax return and the director’s self-assessment return. In most cases, directors with overdrawn loan accounts will not have to pay any tax as long as the sum is repaid within nine months and one day of the company’s account reference date. If a director’s loan account is overdrawn by more than £10,000, the sum will have to be declared on the director’s self-assessment tax return, and the appropriate rate of tax will apply.
Note: you can only pay yourself dividends if you have profits remaining in the company after paying all your corporation tax.
Majority of locum optometrist would be expected to have distributable profits (assuming you have not invested heavily on equipment, car, etc.). In this case, income can be taken out of the company in the form of dividends. This is an incredibly tax efficient method of taking a payment as there is no personal tax liability on net dividends up to £30,892.50. Even payments above this level will attract a more favourable tax rate than if the money were taken as a salary.
To enable a dividend to be paid a director’s meeting must be held to declare the dividend, with the minutes of the meeting being kept for future reference. This is the case even if there is only one director (as is the case with most locum Optometrists), and is often overlooked by companies with a sole director and shareholder.
A dividend voucher must also be prepared for any dividends paid which should include the date, company name, name of the shareholder being paid the dividend and the amount. A copy of the voucher must be given to the shareholder receiving the dividend, with a copy being retained by the company.
It is important to note that tax may be due on dividend receipts in excess of the dividend allowance which is currently £2,000.
Dividends must also be declared by the individuals as part of their self-assessment tax returns
Profit and subsequent cash earned by your limited company is not disposable cash for you as a locum to spend for personal expenditure.
If you did want to spend the money earned by you by your company, you would have to withdraw the cash from the company by the form of a salary, loan or dividend.
The careful use of a combination of these methods can be an extremely tax efficient way to minimise tax liabilities. This is due to the fact that corporation tax is payable at just 20 percent, while income tax on earnings over £42,385 (with the £10,600 personal allowance) sits at 40 percent.
Ask your accountant for a calculation of what is the best combination for you or contact our in-house dual qualified locum and Chartered accountant at [email protected]