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10th November 2020

You and your company are financially independent entities, meaning that you are not personally responsible for your company’s finances. For those that are new to contracting, or perhaps come from a sole trader background may be a little confusing. Contractors generally are one-man limited companies, which makes it easy to confuse private and limited company finances.

Things to clear up first

Different Entities

Having a limited company is not the same as self-employment, as in you are the director of a limited company.  Being a director does however bring responsibility, so you must always ensure that you act in the best interest of the company.

Separate Finances

Your company will have its capital, bank account, income, expenses liabilities and retained profits. As a director, you can decide to pay yourself a salary and receive an appropriation of the profits (dividends) as a form of remuneration in return for generating income for the company.

Owing money to your company

Until you have a system in place it is all too easy to draw too much money out of your company, but how do you tackle the problem? Let’s have a look at the two of the most common scenarios in which this can happen:

When there are retained profits in the company

In this scenario, your company has plenty of retained profits available for distribution through dividends. Based on your needs, your accountant advised you on the level of dividends you can draw while remaining tax-efficient, but you have taken too much. So what are your options?

  • Keep the dividends and pay the extra tax
  • Repay the excess amount to remain tax-efficient (this may, however, have implications from a director’s loan perspective)
  • Declare the excess amount as a loan made to the director (you can read about director’s loans in-depth here)

When your company has no cash

Say you are new to contracting, you look at your bank account and see that there is a healthy balance. You proceed to take the funds you need only to find out from your accountant next time your records are up to date that you owe that money back to your company, or it won’t be able to pay its bills. So what happened and how do you tackle the problem?

  • Remember that the bank balance is not the same as the available profits. Your limited company will have liabilities to pay, and money for those will have to be available in the bank account.
  • The simplest thing you can do is to stop taking money out of your company until it recovers and it’s able to accumulate cash and profits.
  • Lend your limited company some money. Put some of your own money into the business and take it back out once it has sufficient funds to pay you back.

What if your company owes you?

We have now talked about your company being owed to, but sometimes the opposite might happen. In what scenarios can this occur?

  • Cash flow – often the case with new businesses, where the director puts money in to cover startup costs.
  • Investment – the company might need additional funds to finance new equipment. You can advance the money similarly to the above scenario.
  • Expenses – Probably most common amongst contractors who pay company expenses out of their own pocket, which is then needed to be paid back.

If you are the director, the money you put in gets accounted for in an account in the balance sheet called “director’s account”; imagine it as your personal account within the business. This will show the amount that is either owed back to the director or owed by them back to the business.

If you are owed money that you put in for any of the reasons mentioned above, you can draw it tax-free at any time the business has the funds to pay it back. Remember to consult your accountant first to be sure that this is the case.

How to make the day-to-day running of your business easier?

Don’t

  • pay personal expenses (like your personal tax) from the bank account. This is just not good practice, as we mentioned below, it is not your money.
  • draw dividends before confirming with your accountant.

Do

  • pay for business expenses with the company card to avoid having to pay yourself back all the time.
  • pay dividends quarterly after consulting your accountant, and also to avoid raising a flag with HMRC (they may deem frequent withdrawals as salary and tax it as such).
  • speak to your accountant before any decision that affects your company financially.

The takeaway

What you should take away from this is that your company is a business on its own right that is financially independent. You, as a director, have two ways in which you can draw money out, either as a form of a salary or via dividends. You can read more on those in another article of ours here.

And finally, please remember to always talk to your accountant before making a decision that could impact the company’s finances. You can save yourself from a lot of headaches and potential penalties if you don’t rush into these decisions. You pay your accountant to tell you what’s best for you and your business; why not make use of their expertise?

How can MyAccountant help?

Our business has been created with one purpose in mind, making contracting easy through a personal service. Each of our clients gets an accountant assigned to them who are never more than a phone call or e-mail away. There are no call centres or customer teams around here to put you on hold if you have a question. This system allows our accountants to have an in-depth knowledge of their contractors business and provide proactive advice based on your circumstances.

If you liked this guide, please remember to follow us on LinkedInFacebook and Twitter, plus the blog section of our website for more useful and relevant information.

If you would like to know more about MyAccountant, e-mail us at info@myaccountant.co.uk or call 0800 917 9100 and see what we can do for you.

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