How to take money from your company without director’s loan stress
For many limited company directors, one of the most confusing questions is simple:
How should I take money out of my company?
It can be tempting to treat the company bank account like a personal account, especially in a small owner managed business. But a limited company is legally separate from its directors and shareholders. The company’s money is not automatically your money, even if you own the company.
Taking money out in the wrong way can create director’s loan account problems, unexpected tax charges and year end stress.
This guide explains the main ways to take money from a company and how to avoid common director’s loan issues.
The company’s money is separate from your money
A limited company is a separate legal entity.
That means money earned by the company belongs to the company first. To take money personally, it needs to be recorded properly.
The main ways directors commonly take money from a company are:
- Salary
- Dividends
- Reimbursement of business expenses
- Repayment of money previously lent to the company
- Pension contributions
- Director’s loans
Each route has different tax and administrative consequences.
GOV.UK explains the main ways money can be taken from a limited company on its taking money out of a limited company page.
Salary
A director can be paid a salary through PAYE.
Salary is usually treated as an allowable business expense for Corporation Tax purposes, provided it is wholly and exclusively for the business. It may also help maintain National Insurance contribution records, depending on the level of salary and the director’s wider circumstances.
However, salary can create PAYE and National Insurance obligations for both the director and the company.
If the company pays salary, it will usually need to operate payroll, make RTI submissions to HMRC and deal with any PAYE, employee National Insurance and employer National Insurance due.
A salary can be useful, but it should be planned properly rather than guessed.
Dividends
If you are a shareholder, you may be able to take dividends from the company.
Dividends are paid from post tax company profits. This means the company must have sufficient distributable profits before a dividend is declared.
A dividend should be properly documented with:
- A decision to declare the dividend
- Dividend vouchers
- Clear accounting records
- Evidence that the company had sufficient profits available
Dividends should not be used simply to clear personal withdrawals if the company does not have the profits to support them.
Dividend tax rates and allowances can change, so it is worth checking the current position on the GOV.UK dividend tax page.
Reimbursed business expenses
If you personally pay for genuine company expenses, the company can usually reimburse you.
Examples might include:
- Business travel
- Software subscriptions
- Office supplies
- Professional fees
- Equipment
- Mileage for business journeys
- Other costs incurred wholly and exclusively for the company
The key point is that the expense must be a company expense and should be supported by records.
Reimbursing genuine business expenses is different from taking company money for personal spending.
Repayment of money you lent to the company
Sometimes directors put personal money into the company.
For example, you may have used personal funds to start the business, cover early costs or support cashflow.
If the company later repays that money to you, the repayment is usually not salary or dividends. It is a repayment of money the company already owed you.
This should be recorded through the director’s loan account.
Good records are important so that it is clear whether a payment is a repayment of money owed to the director or a new withdrawal by the director.
Pension contributions
Company pension contributions can be an effective way to extract value from the business for long term planning.
Employer pension contributions may be deductible for Corporation Tax purposes where they meet the relevant rules and are wholly and exclusively for the business.
Pension planning should be considered carefully, especially where contribution levels are significant, the director has other income, or there are annual allowance considerations.
This is an area where advice is usually worthwhile.
Director’s loans
A director’s loan arises when money moves between the director and the company and it is not salary, dividends, expense reimbursement or repayment of money previously owed.
GOV.UK describes a director’s loan as money taken from the company that is not salary, dividend, expense repayment or money you have previously paid into or loaned to the company. You can read HMRC’s overview on the GOV.UK director’s loans page.
A director’s loan account can go in either direction.
If the company owes money to the director, the account is usually in credit.
If the director owes money to the company, the account is overdrawn.
Why overdrawn director’s loan accounts cause stress
An overdrawn director’s loan account means the director owes money to the company.
This can happen when:
- Personal spending is paid from the company bank account
- The director takes regular withdrawals without payroll or dividend planning
- Dividends are assumed but not properly declared
- Dividends are declared when there are not enough distributable profits
- Business and personal spending are not clearly separated
- Bookkeeping is not kept up to date
The issue often only becomes visible when the accounts are prepared.
By that point, it may be too late to fix the position cleanly before the company year end.
The Section 455 tax charge
If a director who is also a shareholder owes money to the company, the close company loan rules may apply.
Where the loan remains outstanding more than 9 months and 1 day after the company’s year end, the company may need to pay an additional Corporation Tax charge, commonly known as a Section 455 tax charge.
This charge is separate from the company’s normal Corporation Tax liability.
The company may be able to reclaim the tax later if the loan is repaid, written off or released, but there is a delay before relief can be claimed. GOV.UK explains the timing on its director’s loan repayment and reclaim guidance.
The best approach is usually to avoid unexpected overdrawn balances in the first place.
Interest and benefit in kind issues
A director’s loan can also create a personal tax issue if it is interest free or charged at less than HMRC’s official rate.
If the loan exceeds £10,000 at any point in the tax year and the company does not charge interest at HMRC’s official rate, it may create a taxable benefit in kind.
The company may also need to report this to HMRC and there may be Class 1A National Insurance implications.
This is another reason why director’s loans should be reviewed regularly rather than left until the accounts are prepared.
Bed and breakfasting rules
It is not usually possible to avoid the tax charge simply by repaying a director’s loan shortly before the deadline and then taking the money out again soon afterwards.
HMRC has anti avoidance rules that can apply where loans are repaid and then replaced.
These are often referred to as “bed and breakfasting” rules.
The purpose of these rules is to prevent artificial repayments that do not genuinely clear the loan position.
If a loan is being repaid close to the deadline, and further withdrawals are expected, advice should be taken before assuming the repayment has solved the problem.
Common mistake: treating every payment as a dividend
A common mistake is to assume that all money taken by a shareholder director can simply be treated as dividends at the year end.
This only works if the company has sufficient distributable profits and the dividends are properly documented.
If the company does not have enough profits, or if the paperwork is not in place, the withdrawals may instead create an overdrawn director’s loan account.
This can lead to tax consequences that could have been avoided with better planning.
Common mistake: using the company card for personal spending
Small personal purchases from the company bank account or company card can quickly add up.
Examples might include:
- Personal subscriptions
- Groceries
- Family travel
- Personal meals
- Household costs
- Non business shopping
Even if the amounts seem small, they need to be recorded properly.
If they are not genuine business expenses, they may be treated as money taken by the director and posted to the director’s loan account.
Common mistake: not checking available profits before dividends
Dividends can only be paid from distributable profits.
A company may have money in the bank but still not have sufficient profits to support a dividend.
This can happen where:
- Corporation Tax has not yet been allowed for
- VAT or PAYE liabilities are due
- The company has made accounting losses
- Previous dividends have already used available profits
- There are year end adjustments not yet reflected in the bookkeeping
Cash in the bank is not the same as profit available for dividends.
How to take money out with less stress
The best approach is to agree a clear extraction plan.
This might involve:
- A regular salary through payroll
- Planned dividends where profits allow
- Proper reimbursement of business expenses
- Reviewing director’s loan balances regularly
- Avoiding personal spending through the company
- Considering pension contributions
- Keeping bookkeeping up to date
- Reviewing the position before the company year end
The right mix depends on the company’s profits, the director’s personal income, National Insurance position, dividend tax position, pension planning and cashflow needs.
Use a separate personal and company bank account
This sounds obvious, but it is one of the most important practical points.
Company income and expenses should go through the company bank account.
Personal spending should go through personal accounts.
Where directors regularly mix the two, the bookkeeping becomes harder, the year end review takes longer and the risk of director’s loan problems increases.
Clear separation makes everything easier.
Keep bookkeeping up to date
Director’s loan problems often arise because the director does not see the position until months after the year end.
Regular bookkeeping helps identify issues earlier.
For example, it can show:
- Whether drawings are building up
- Whether dividends are being supported by profits
- Whether expenses are being coded correctly
- Whether there are personal costs in the company accounts
- Whether the company can afford planned withdrawals
Good bookkeeping is not just about filing accounts. It helps directors make better decisions during the year.
Review before the company year end
The company year end is an important checkpoint.
Before the year end, it is worth reviewing:
- Salary paid to date
- Dividends declared
- Available distributable profits
- Director’s loan account balance
- Corporation Tax position
- VAT, PAYE and other liabilities
- Planned personal withdrawals
- Pension contribution options
If there is a problem, it is usually easier to address before the year end than after it.
What if the director’s loan is already overdrawn?
If your director’s loan account is already overdrawn, do not ignore it.
Possible options may include:
- Repaying the company personally
- Declaring a dividend, if profits are available and you are a shareholder
- Processing additional salary or bonus through payroll
- Charging interest where appropriate
- Reviewing whether any entries have been incorrectly posted
- Planning repayment before the 9 months and 1 day deadline
- Considering the tax consequences if the loan cannot be cleared
The right option depends on the figures and circumstances.
It is important not to force a solution that creates a bigger problem.
Questions to ask yourself
If you are a director of a small company, it is worth asking:
- Do I know how much I have taken from the company this year?
- Do I know whether those payments are salary, dividends, expenses or loans?
- Are dividends being properly documented?
- Does the company have enough profit to support the dividends?
- Have I paid any personal costs from the company account?
- Is my director’s loan account overdrawn?
- Have I reviewed the position before the company year end?
If the answer to several of these questions is “I’m not sure”, it may be time to review the position.
How CooperFaure can help
CooperFaure supports limited company directors with accounts, Corporation Tax, payroll, dividends, bookkeeping and practical tax planning.
We can help you understand:
- How you are currently taking money from the company
- Whether your director’s loan account is overdrawn
- Whether dividends are properly supported
- How to plan salary, dividends and expenses
- Whether pension contributions should be considered
- How to avoid unexpected Section 455 tax charges
- How to improve bookkeeping and reporting
If you are unsure whether you are taking money from your company in the right way, we can help you review the position and agree a practical plan.