3Spoken

October 24, 2006

Getting It Out

Filed under: Running a Limited Company — NeilW @ 10:00 am

How do I get money out of my company?

The answer to this question is surprisingly straightforward

  • Treat your company like a bank

And yes it really is that simple. You have a deposit account with your company and any transaction you make on behalf of your company goes through that account.

But like all deposit accounts you need to make sure there is some money in it before you try and draw anything out!

Setting up the account

You have one personal deposit account with the company for each individual who has one or more of these roles:

  • officer (ie. director or company secretary)
  • member (ie shareholder or guarantor)
  • loan creditor

(Where you have an employee that has a lot of expenses, you may want to set one up for them).

I name these accounts after the individual. So mine is “Neil’s account”, but you can be more descriptive if you want, e.g: “Fred’s personal account”.

Classically these accounts are called “Director’s current accounts” or “Director’s Loan accounts” or simply “DLA”. But I find the personal descriptive names more useful.

Drawing money out

Once you have an operating personal account with the company, drawing money out becomes very simple:

  • If the account with the company is in credit, you can withdraw money for personal use whenever you like up to the amount that is in there.
  • If the account isn’t in credit then you need to fill it up first.

Putting money in

To get the account into credit you have to pay something into it, and this is where the accounting and tax planning comes in. Whereas for employees you have just net salary and for sole traders/partners you have profit, a owner-managed company has to decide from a whole host of payment types.

All the payment types have one effect in common – an amount of money is paid into the personal deposit account.

In rough order of tax efficiency you have:

(Click on the links for more details)

And on top of these regular payments you have the ad hoc contributions to the personal account

  • whenever you pay for something personally the company has contracted for (services or goods).
  • balancing loan credit when you incorporate a sole trade/partnership
  • any other time you loan money to the company for any purpose (as opposed to subscribing for shares).

Separation

By using a personal account with the company, you uncouple the drawing side from the paying in side. The two need not occur at the same time. So although you draw money once a month, for example, you may pay into it only once a quarter, once a year or twice a week depending upon how you administer the company.

The value of the personal account shows you how much of the company’s cash is yours.

Advertisements

6 Comments »

  1. Hi Neil,
    Thanks for this.
    So as a director of the company, the decision as to whether or not to go PAYE is purely one of personal tax planning. I had in mind that there might be some ‘rule of thumb’, something like: if you are taking out £X per month from the company, then it is worthwhile going down the PAYE route, but less than that then it isn’t. But I guess things are not that simple!

    Comment by Andrew — October 24, 2006 @ 11:42 am | Reply

  2. PAYE is simply the way that certain payments from a company to an individual are taxed – the ones known as ‘earnings’. With a controlled company you can turn your profit into Earnings, Property Income, Savings Income, Investment Income, Trading Income and even Capital Gains in the hands of the individual – all of which attract a different tax calculation.

    Click on the red links for more information on each payment type.

    Comment by NeilW — October 24, 2006 @ 12:39 pm | Reply

  3. Neil – thanks, that is a great help. I only had time for a quick scan when I first looked yesterday and didn’t notice the hyperlinked type. I’ve had a look now and am much clearer.

    Comment by Andrew — October 25, 2006 @ 12:07 pm | Reply

  4. Neil,
    thanks for the clear and unambiguous presentation of such useful information.
    By the way, shouldn’t ‘mileage on business use of personal bicycle’ be at the top of the list too?

    Comment by Le Petit Fou — October 30, 2006 @ 4:51 pm | Reply

  5. That is deliberate. I’m writing an abstraction here based around a small set of rules that will handle the general case as well as possible. There are so many twists and turns in the tax legislation most of which are dead ends that frankly aren’t worth the hassle. I can’t provide the simplicity I want to provide without turning certain options into assumptions.

    The assumption here is that people claiming mileage drive cars.

    Comment by NeilW — October 30, 2006 @ 8:23 pm | Reply

  6. Hi, Neil, Regarding the ‘Rental’ Homeworking Payment arrangement, which is a great suggestion, there is something that should be included when setting this up, which is to get a Board Minute entered about the company’s decision to rent office facilities. This demonstrates to the Taxman that the benefit was agreed by the company as a way of rewarding the house owner for their services, and helps to meet the “wholly and exclusively” qualification.

    (Spotted this in the Tax-Tips advices and thought it would be good to pass it on.) Hope it helps.

    Comment by Firethorne — November 10, 2007 @ 12:02 pm | Reply


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: