If you have recently set up a Limited Company, and you can see the money adding up in your business account, you probably want to take some of that money to pay yourself. So you could just withdraw the money because it’s your company, right? No, not quite!
Why Can’t I Withdraw Funds Whenever I Want?
Technically you can, but it is not the best practice. If you have previously been self-employed, then you are probably used to this way of working. It’s different because when you are self-employed, you pay tax on any profit made, regardless of how much you pay yourself.
Now that you are trading as a Limited Company, things have to work differently. The critical thing to remember is that your Limited Company is an entirely separate legal entity to yourself. Any money in the business bank account belongs to the business, not to you. This is why the business is liable for any debt, and why your personal assets, such as your house, won’t be used against the business. Your company pays a separate tax bill to what you will have to pay as an individual. Therefore all of this money should be kept in a different account to yours. This is the reason why you cannot take money out of the business account, as and when you feel like it.
How Do I Take A Salary?
As the Director of the company, you need to register as an employer with HMRC, and then put yourself through on the payroll. Doing it this way comes with certain benefits, like your national insurance contributions, and your pension. Another advantage is that a salary is a tax-deductible expense, which reduces your year-end corporation tax liability.
What If I Use My Business Account Accidentally?
If you pay for something using the business account by accident, such as paying for petrol in a private vehicle, the best thing that you can do is to pay it straight back. The odd mistake is OK, but if you start owing more, then you could face some issues. If the amount owed reaches £10k, then HMRC will consider this as additional income, and you will have to pay the tax on it until it is paid off.
The best way to look at things is to see your Limited Company as the person that pays your salary, and nothing more (financially). Getting into a pickle over an unnecessary payment isn’t worth the uproar, and the last thing you want to face is an HMRC investigation. Your accountant can go through business expenses with you and can tell you what HMRC will and will not accept. Starting a new business can be overwhelming, but it is all worth it! Take a look at our free e-book to kick-start your new business.