How to Take Money Out of a Limited Company

Setting up a limited company is a hallmark of professional growth for many UK entrepreneurs. However, it brings a critical legal reality: the company is a separate legal entity. The money in the business bank account does not belong to you; it belongs to the company.

To avoid heavy penalties from HMRC, you must follow strict procedures to extract funds. In this comprehensive guide, we will explore the most tax-efficient and legal ways to take money out of your limited company in the 2025/26 and 2026/27 tax years.

Director’s Salary: The Foundation of Remuneration

As a director, you are technically an employee of your own company. Paying yourself a regular salary via PAYE (Pay As You Earn) is the most common method of withdrawing money.

Setting Up PAYE

Before you can pay yourself, your company must be registered with HMRC as an employer. You will then need to run payroll—either monthly or weekly—to report your earnings and any tax or National Insurance (NI) deductions to HMRC via a Full Payment Submission (FPS).

Tax Efficiency and Thresholds (2025/2026)

For the 2025/26 tax year, the strategy for most directors is to pay a salary up to specific thresholds:

The Personal Allowance (£12,570): This is the amount you can earn before paying Income Tax.

The Primary Threshold (£12,570): You won't pay Employee National Insurance if your salary stays at or below this level.

The Secondary Threshold (£5,000): From April 2025, the employer NI threshold was lowered significantly. This means the company pays 15% Employer National Insurance on earnings above £5,000.

Why pay a salary at all? Even if you pay yourself a low salary (e.g., at the Lower Earnings Limit of £6,500), it counts as a "qualifying year" for your State Pension without you actually having to pay NI contributions. Furthermore, salaries are a tax-deductible expense, meaning they reduce your company’s Corporation Tax bill.

Shareholder Dividends: The Profit-Sharing Strategy

Dividends are payments made to shareholders from the company’s post-tax profits. If your company hasn't made a profit after paying all expenses and Corporation Tax, you cannot legally issue a dividend.

How Dividends Work

Dividends are popular because they do not attract National Insurance contributions. However, the tax-free Dividend Allowance has been reduced to just £500 for the 2025/26 tax year.

Dividend Tax Rates (2025/26)

Note for 2026: In the 2025 Autumn Budget, the government announced that from April 6, 2026, the Basic Rate for dividends will rise to 10.75% and the Higher Rate to 35.75%. If you are reading this in early 2026, it may be beneficial to declare dividends before the April deadline to lock in current rates.

Legal Requirements

Even if you are the sole director and shareholder, you must:

Hold a "board meeting" to declare the dividend.

Keep minutes of that meeting.

Issue a dividend voucher showing the date, company name, and amount.

Director’s Loan Accounts (DLA)

A Director’s Loan is any money you take from the company that isn't salary, dividends, or expense reimbursement.

The "Overdrawn" Loan Account

If you take more out than you put in, your DLA is "overdrawn."

Under £10,000: There are generally no immediate personal tax implications, but the company may face Section 455 Tax.

Over £10,000: This is treated as a "benefit in kind." You must report it on a P11D form, and you may have to pay personal Income Tax on the "interest" you are effectively saving by not taking a commercial loan.

Section 455 Tax (The 33.75% Trap)

If you do not repay the loan within nine months and one day of the company's year-end, the company must pay Section 455 tax at 33.75% of the outstanding balance. While this tax is refundable once the loan is repaid, the process of getting that money back from HMRC can take over a year.

Reimbursement of Business Expenses

If you use your personal money to pay for business costs (e.g., travel, stationery, or software), you can withdraw that exact amount from the company bank account tax-free.

Key Rules for Expenses:

The expense must be "wholly and exclusively" for business purposes.

You must keep all receipts and records.

Standard mileage rates (45p per mile for the first 10,000 miles) can

be claimed for business travel in your personal vehicle.

Special Cases: Companies Limited by Guarantee

Commonly used by non-profits or residents' associations, these companies don't have shares. Therefore,dividends cannot be paid. Money can only be extracted via salary or expenses. Often, these companies are set up so that all surplus is reinvested into the organization's goals.

Managing Dual Income: Employment and Self-Employment

It is entirely legal to have a "day job" while running your own limited company. However, your tax bands are cumulative.

Income Tax: Your personal allowance (£12,570) is shared across all jobs. If your primary employer uses your full allowance, every penny you take as salary from your limited company will be taxed at 20% or higher.

Self-Assessment: You will be required to file a yearly tax return to declare your combined income from your job and your company (dividends/salary).

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Service-Related Questions & Answers

1. Can I just transfer money to my personal account for a holiday? No. This would be classed as a Director's Loan.

If not handled correctly as a dividend or salary, it could trigger Section 455 tax or be taxed as a Benefit in Kind.

2. What is the most tax-efficient salary for 2025/26? For most sole directors, a salary of £12,570 is recommended to utilize the personal allowance, though you will incur some Employer NI.

3. Do I pay National Insurance on dividends? No, dividends are exempt from National Insurance, which is why they are a popular way to extract profit.

4. How much is the Dividend Allowance? For the 2025/26 tax year, the allowance is £500.

5. What happens if I pay a dividend but the company made a loss? This is an "illegal dividend." You may be required to pay it back to the company personally, and HMRC could impose penalties.

6. Can I pay my spouse a salary from my company? Yes, provided they actually do work for the business and the salary is "reasonable" for the duties performed.

7. Do I need an accountant to take money out? While not legally required, an accountant ensures you meet PAYE, Corporation Tax, and Self-Assessment deadlines correctly.

8. What is Section 455 tax? It is a 33.75% tax charge on directors' loans that are not repaid within nine months of the company's year-end.

9. Is mileage a taxable benefit? No, as long as you stick to HMRC's approved rates (45p per mile for cars), it is a tax-free reimbursement.

10. How do I record a dividend? You must produce board minutes and a dividend voucher for every payment made.

11. Can I take money out if my company is in debt? You must ensure the company is solvent. Taking dividends when the company cannot pay its creditors is a serious legal offense.

12. When do dividend tax rates change? Rates are confirmed to increase on April 6, 2026.

13. Does salary affect my Corporation Tax? Yes, salary is a business expense and reduces the profit on which Corporation Tax is calculated.

14. What is the official interest rate for 2025/26? HMRC sets an "official rate of

interest" (currently around 2.25%-3.75%) for calculating benefits in kind on loans over £10,000.

15. Can I be a director of two companies? Yes, but your tax allowances are shared across all income sources.

Disclaimer: The information provided in this article is for general informational and research purposes only. Company details, features, services, and market positions may change over time. Readers are advised to visit official company websites and conduct independent research before making any business decisions or purchasing services.