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Limited company: Dividends and directors loans explained

10 things you should know before applying for a loan
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Do you really understand dividends? If you’re the director of a limited company, however large or small, it’s important that you understand the different ways in which you can be paid. Ensuring that you choose the right method could have tax advantages for both you and the company.

As the director of a limited company, you can be paid in one of three ways (or a combination): a salary, expenses or benefits; dividends; and directors’ loan.

Salary, expenses and benefits

This is probably the worst solution for personal tax purposes, as you’ll make tax and National Insurance contributions like any person employed by a company. The business needs to register as an employer with HMRC and then the company will pay you a regular salary. This must include deductions for Income Tax and National Insurance and the company must also make contributions.

Dividends

Paying yourself dividends from the company is often the route favoured by accountants. It’s an extremely tax efficient way of paying yourself if you’re the director of a limited company. This is only an option, though, whilst the business is making a profit. Should it start declaring a loss or go into administration, you’re unable to ‘declare’ a dividend.

A dividend can be paid to shareholders of a company if there are enough profits. A company can never pay more out in dividends than there are profits from the current or previous years. To do so you must hold a director’s meeting and ‘declare’ the dividend amount. There must be minutes kept of this meeting, which still has to be held even if you’re the only director.

Dividends explainedOnce the dividend has been ‘declared’ it can be paid to all shareholders. For each dividend payment you must write a voucher, which details the date of the payment, the company name, who the dividend was paid to, the amount of the dividend and the amount of any dividend tax credit. A copy of this should be provided for the shareholder and another kept for the company’s records.

The tax credit means the company doesn’t have to pay tax when the dividend is paid. To calculate the amount of tax credit, simply divide the dividend amount by 9. If the shareholder is a basic rate tax payer then they will not be liable for any deductions. However, higher rate shareholders may have to pay tax and declare it on their self assessment.

Directors loans

The third way of claiming remuneration from a business as one of its directors is to advance yourself a business loan. This means that you’ve taken more money out of the business than you’ve put in. Therefore, the business is loaning you the money and you still need to pay it back at some point in the future. As with any other business transaction, it’s important that you keep records of any director’s loans that are paid.

You may consider taking out a director’s loan for a number of reasons. It could be cash or expenses that are used for personal reasons, including paying for living costs if you can’t pay yourself a salary or dividends. In order to pay back the loan, you need to deposit the funds back into the company’s bank account or it could be paid through your salary or dividend payment.

However you choose to advance and pay back a director’s loan, it’s important that the transaction abides by the 2006 Companies Act. Any loan over £10,000 needs shareholder approval. Any loan needs accounting for in the company’s Corporation Tax return and you’ll be liable to pay tax on any outstanding balance. You won’t need to declare it on your return or pay tax if the loan is paid off by the end of your company’s Corporation Tax accounting period. If you repay the loan within nine months of the year end, then you will have declared it on your return, but will not need to pay tax on it. After this point you will need to pay tax on the outstanding balance.

Discuss your options

Whichever way you choose to pay yourself through the company, it’s important that you discuss the options with your accountant and ensure you’re abiding by the rules. All three choices have their advantages and disadvantages and you need to choose the one that’s right for both your circumstances and the business.

 

 

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One Response to “Limited company: Dividends and directors loans explained”

  1. WAYNE

    Hi thanks, great article.

    I’m very new to running my limited company.

    I currently have a directors loan account from my business currently approx. £1500. I don’t owe anything to my suppliers. I have in my business account £5000 which is profit. What would be the best way to access this money?

    I was wondering if the best way would be a dividend but want to be sure that I do this correctly.

    When declaring the dividend, do I have to leave enough in my account to cover the corporation tax ie: 20% = £1000?

    please advise.

    Thankyou

    Reply

About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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