It may seem like an obvious statement, but making sure you have a business account in the first place is imperative. If you are an incorporated Limited Company, this is a legal requirement, or if you are a Sole Trader, whilst you don’t legally need to do this, we advise that you set one up to ensure that your business transactions are separate from any personal banking activities. It also makes it easier to maintain and verify accurate accounts for reporting and tax returns.
The majority of the tips below would only apply to directors of Limited Companies, as processing a salary via a payroll if you operate as a Sole Trader would be meaningless as the money left after you have deducted your business expenses from your income and paid your taxes belongs to you.
Taking a salary
By far the easiest way to take money out of your business is to pay yourself a regular salary. You will have to deduct any income tax, National Insurance and Employer’s National Insurance contributions due and make payments to HMRC.
The remaining salary after deductions is, of course, yours to use for any personal expenditure. Taking a salary regularly – monthly for example – ensures that you have access to personal funds reasonably quickly, if you need them.
Dividends are a tax-efficient method of receiving money from your business. Funds to pay dividends are available from any remaining profit after payment of corporation tax.
It may be prudent to retain some of that profit for future investment or for other business purposes. You may wish to retain some of that profit for investment or other business purposes, but you can take the remainder in addition or as an alternative to a salary.
Dividends are generally paid at the end of your financial year, and without a clear profit forecast throughout the year, it can be difficult know the funds available to pay dividends throughout the year.
If you have multiple shareholders in your business, remember that you will have to provide them with a share of the total dividend based on the share split of the business!
Reimbursement of Business Expenses
As a business owner, you should endeavour to cover business expenses via the business account. There may be occasions, however, when you need to use your own personal account or credit card for business expenses. Provided that the expenditure is wholly for business purposes, you can reimburse yourself for the costs. Looking at this from a tax point of view, this would not be classed as additional income, so you won’t be losing any money for handling things in this manner… but try to stick to the business account, it’s easier for everyone!
Take what you need per month, not per day!
Leading on nicely from sticking to the business account, if you frequently take money out of the business for personal expenses, you will increase the amount of time you or your accountant have to spend on record keeping. This will undoubtedly increase the costs you incur in preparing your books and accounts.
In addition, frequent withdrawals for varying amounts create a blurred image of your cash flow. Understanding your cash flow is essential at every stage of your business, but even more so for new start-ups. Make sure that you understand your cash position, so as not to make late payments to your creditors!
Withdrawing money from your business is a complicated matter, so if you have any questions on the issues raised in this article, please do not hesitate to get in touch with either your account manager, or via the enquiry form on our website: www.cma-accountancy.com