Contractors' Questions: How to withdraw my limited company’s funds?

Contractor’s Question: What’s the least taxing way to take £4,000 out of my new limited company, bearing in mind that the money is the only funds I’ve put into my business bank account due to me still being a permie, albeit an enterprising one who earned the money IT contracting during annual leave? Will I have to pay corporation tax; VAT or anything else? I’m looking for the cheapest way to get my hands on the £4k.

Expert’s Answer: So you’ve got a limited company and want to withdraw the funds and avoid a big tax bill? This is absolutely possible but it’s entirely relative to the total amount of income you earned during the year.

As a full-time employee, it’s likely that your employment income for the year will exceed the £11,000 tax-free personal threshold, making you liable to pay tax on any additional income. As a company your income would be taxed at 20%, regardless of its turnover, so the money available to you after paying tax would be £3,200, which would have to be withdrawn as dividends.

And from 2015/16, there’s a dividend relief so you won’t pay tax on the first £5,000 of dividends. Therefore, in this instance, the only taxes due on the £4,000 would be just the corporation tax.

However, if you were to withdraw more than £5,000 of dividends while earning more than £11,000, then these additional dividends would be subject to tax at the band rates 7.5%, 32.5% and 38.1%, dependent on your overall earnings.

Regarding VAT, you would have to be a VAT-registered business to charge it to your client then pay it to HMRC. VAT registration is mandatory if your turnover exceeds £82,000 and voluntary if you choose to be, so unless you’re VAT-registered you wouldn’t have to pay VAT on your income.

The expert was Chris Conway, managing director of Accounts and Legal.