How can you legally take money out of a company?
It is an often misunderstood point that money held by a company can be withdrawn as it can via a sole trade or partnership.
When a limited company is incorporated, it becomes a legal entity in its own right. The assets and profits belong to the company, not the directors and shareholders.
A common problem is where directors withdraw funds monthly, to cover the cost of living, and end up with a large overdrawn loan account at the year end i.e. they owe the company for the money withdrawn.
If this balance is not repaid within 9 months of the year end, the director owes tax at a rate of 33.75% (2022) on any outstanding balances.
This tax will be repaid by HMRC when the balance is cleared, but there is a time lag and you do not want funds tied up for this length of time.
Many business owners are caught out by this and it is vital to discuss your financial needs with your accountant, and make a plan for withdrawing necessary funds as tax efficiently as possible – this should be done prior to the funds being required.