Sorry I don’t speak accounting (Part 2)


Accounting is arguably a completely different language to anything else you speak – some would even say it’s easier to learn Chinese!

As a business owner you want to focus on growing and improving your business, but the financial state of your business is an essential part of this.

This is part 2 of a series that helps explain accounting and finance terms you might hear and wonder what they actually mean. This one will focus on various ways to extract money from a limited company. If you’re looking for Part 1, you can find it here.

1. Dividends

This is a way to extract profits from your business. It’s different to salary as it is paid only to the shareholders of the business and is decided by the directors on an ad-hoc basis. You cannot take more dividend from your business than the profit you have made since it was incorporated (retained earnings).

On a company level, dividends are taken from the business after tax, so they do not offer a tax deduction.

On a personal level, if you receive dividends, they are taxed at a lower percentage than salary.

2. Salary

This is a routine payment made by the company to it’s employees (including directors). If you are purely a shareholder, you cannot receive a salary from the company. It is a payment in exchange for work provided and is traditionally on a monthly basis. That being said, there is nothing wrong with paying it weekly or even annually.

Salary is deducted before tax, therefore saving on company tax. However, it is taxed at a higher rate at a personal level.

3. Directors Loan Account

This is where the company loans the director a sum of money (or the director loans the company a sum of money). It can be for any amount, any period of time and at any kind of interest rate. That being said there are repercussions if the interest rate is below a market rate, the time exceeds 9 months after the company’s year end and the sum exceeds £10k.

Directors loans for small businesses tend to exist when the director accidentally uses the company bank account rather than their own one. It’s a legal requirement to pay this money back because otherwise you have withdrawn money from the business tax-free.

4. Bonus

A bonus is a reward for a certain behaviour, whether it is meeting KPIs, attendance, or rewarding one-off work. It is paid to employees on an ad-hoc basis and is seen as an extension to the employee’s salary. This means that it is taxed in the same way.

5. Taxable Benefit

A taxable benefit is a benefit provided to an employee in non-monetary form. This could be in shares, a company car, gym membership, private medical care and many other options. HMRC still taxes these benefits as if they are salary to prevent companies from paying employees in goods / services rather than cash. There is also additional paperwork to complete for HMRC to declare these benefits.

For more information on accounting jargon, cloud accounting, tax returns and a “no obligations” consultation, contact me via the following link.

ASU Accountants is based in Cranfield, Bedfordshire, UK. We embrace technology so don’t worry if we’re not local to you – we actively use Skype in our day to day business!