There are a number of ways a director can extract money from their limited company.

The money can usually be withdrawn in one or more of the following ways. For most directors, the optimum way to minimise personal tax liabilities will be using a combination of these methods. 

1. Salary, expenses and benefits
2. Dividends
3. Director’s loan

Salary, expenses and benefits

Directors must ensure they are employed as an employee of their company and their salary is paid via PAYE. Most directors prefer to take a smaller salary and take a larger share of their pay in dividends. This is usually the most tax efficient method, but care needs to be taken based on individual circumstances. 

Dividends

The tax-free dividend allowance is currently £2,000. The tax rate for dividends received in excess of the dividend tax allowance are taxed at: 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. 

To pay a dividend, the company must:

• hold a directors’ meeting to ‘declare’ the dividend
• keep minutes of the meeting, even if there is only one director

Also, dividends can only be paid if there are sufficient retained profits to cover the payment.

Director’s loan

A director's loan account is created when a director (or other close family member) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. 

Usually, when directors have overdrawn loan accounts, they do not have to pay tax, as long as the sum is repaid to the company within 9 months and one day of the account's reference date.

However, the rules are further complicated if the loan is for more than £10,000 as interest must be charged. There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company.