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My company, my money. Think again!

One common way to run into trouble with your limited company, is to take out more money than the company can afford. It’s easily done, particularly now with the impact of Covid on profits, combined with the increased cost of living. When household bills need to be paid and there’s money in the company bank account, it’s very tempting to just withdraw what you need to get by. Why is this so bad for both you and the company and what are the alternatives?

Whose money is it anyway?

When you’re both a director and shareholder, it can seem natural to think of the company’s money as your own. Particularly if you’ve come from employment or running a sole trader business, it’s not always clear how a limited company is different.

If you’re a sole trader, then you and the business are classed as the same legal entity. That means, the assets and the profits of the business all belong directly to you as the owner.

A limited company is a separate legal entity to both its directors and its shareholders. The assets, the money in the bank and the profits all belong to the company itself. As a director or shareholder of a company, you can’t just take out money whenever you like. That money belongs to the company, not to you personally. 

How can I take money out of my company?

If you’re both a director and shareholder, there are two main ways to “pay” yourself from a limited company: salary, dividends or more commonly, a combination of both.


Salary can be paid to employees of the company. Being a company director means you’re classed as an employee and if there’s a payroll, you can pay yourself a salary.

Salary comes out of the company’s taxable profits. Taking a salary can be beneficial because both salary and employer national insurance contributions will reduce the company profits and so reduce the corporation tax. However, employment salary does attract personal income tax and employee national insurance.

For a director with no other employment income the salary amount is usually optimised at a level around the personal allowance (avoiding any personal tax on the salary) and avoiding significant amounts of national insurance.

Pros of salary

  • Salary can still be paid even when the company is making a loss.
  • Reduces corporation tax for the company.
  • An effective way to use the personal allowance (save corporation tax without incurring any personal tax).

Cons of salary

  • Only payable to employees. Requires setting up a payroll and monthly filing to HMRC.
  • May not be worth doing if you have other employment with higher income.


Dividend are paid from the profits of the company after corporation tax. If the company has a negative balance sheet (it owes more money than it has in assets), then no dividends can be paid.

Dividends are paid to all shareholders in proportion to the number of shares that they own. So if there are 10 shares and you own 5 of them, that’s half the shares, so you get half of any dividends.

It’s possible to pay different dividend amounts to shareholders by using different classes of share. But this is more complex to set up and the majority of companies are formed initially with one class of share.

Dividends can be formally declared at any time, however it’s most common to see a single large dividend declared at the company financial year end. There might also be an interim dividend during the year, often to coincide with the personal tax year.

Most director / shareholders take the majority of their income as dividends to benefit from the lower dividend tax rate. This is a successful strategy when the company is profitable, but can cause issues if profits drop.

Pros of dividends

Taxed at a lower rate than salary (currently 8.75% , 33.75% and 39.35%).

Some dividends are not taxed. Currently the dividend allowance is £2,000. This is due to reduce to £1,000 from 6 April 2023 and £500 from 6 April 2024.

Cons of dividends

Have to be distributed in relation to the shareholding. Can’t easily be adjusted in relation to income if there are multiple shareholders (without creating additional dividend classes).

No profits = no dividends.

Can be hard to keep track and taking too much can cause an overdrawn director’s loan.

How does it work in real life?

Having a lower salary and higher dividends can be a tax efficient strategy in theory, but in real life it can be tricky to organise. How do you know how much to take out of the company each month? What about if you pay for some company expenses such as travel or mileage?  

This is where the director’s loan account comes in.

What is the director’s loan account?

The director’s loan account often causes confusion because it doesn’t actually exist except in the balance sheet of your accounts. It’s not a real bank account, it’s a “virtual” account that’s a way to keep track of financial interactions between the company director and the limited company.

When you pay personal money into the company or takes money out for personal use, it’s recorded into the director’s loan account. But it’s not just bank transfers that are included.

Paying for personal expenses with the business bank account is treated as if you’re taking money out of the company. You are effectively borrowing that money from the company.

Not paying yourself salary or dividends that are owed to you is recorded as if you’re putting money into the company. You are effectively lending that money to the company. Paying for expenses personally, such as mileage, subsistence etc. and not reimbursing yourself is another way to lend money to the company.

Where do the dividends come in?

So what happens if your director’s loan account ends up with more taken out then owed? This means that you’re left in a position of owing money to the company.

If you’re both a director and shareholder, the debt can be covered by declaring a dividend. This is generally done at company year end or at the tax year end. The idea is to bring the director’s loan back to a position with a zero balance or even a credit balance where the company owes you money.

The risks of once-a-year balancing

It’s common for directors not to withdraw their payroll salary or reimburse expenses during the year. They assume that at year end, the money owed to them will more or less balance off against what they’ve taken out of the business.

However, this once-a-year strategy is can often backfire. When the numbers are added up at year end, the director can be in for a shock. The amount of dividends needed to balance the director’s loan ends up much higher than anticipated.

At best this means more personal tax than expected, but at worst this can mean an overdrawn director’s loan account.

What is an overdrawn director’s loan and why is it bad?

If the company doesn’t have enough profit after tax (or retained profit) to cover the balance on your director’s loan account with dividends, it means you’re left owing money to the company at the year end. The director’s loan account is overdrawn and this is risky to both you and to the company.

Insolvency risks

If the company becomes insolvent, for example through a creditors liquidation, then your director’s loan debt is considered as part of the company assets. The liquidators will expect you to pay some or all of it back so that creditors can be repaid. By owing the company money, you lose one of the main advantages and protections of setting up a limited company, which is the separation between the company debt and your personal debt.

Additional corporation tax

If the director’s loan is overdrawn at year end and it is not repaid within 9 months of the year end, this incurs additional corporation tax. It is known as a close company loan to participators. HMRC will charge 32.5% tax on the outstanding balance (or on any increase on the balance since the last tax year).

If you later repay the overdrawn balance, you can claim the extra tax back from HMRC, however it’s not an immediate process. The claim can’t be made until 9 months after the financial year end date which includes the clear director’s loan. If you cleared an overdrawn directors loan by year end 31 March 20×4, you would not be able to reclaim any additional tax paid until after 1 Jan x5.  

Maybe you’re thinking that you could just settle the loan at 9 months, and then take the money out again straight afterwards? But unfortunately not, this is known as bed and breakfasting and is not allowed for significant amounts.

Additional personal tax

A director’s loan with a balance over £10,000 (at any point in the year) is considered a benefit for the director unless interest is being charged. This is because you are borrowing money at a beneficial rate that’s better than you’d be able to find if you borrowed that money commercially.

You can calculate the interest that would be due on the loan using HMRC’s offical rates and the average balance across the year. This interest can be added to the director’s loan balance and will also be considered as additional income for the company. 

If the company doesn’t charge interest, or the interest is below the official rate, you must declare the beneficial loan as a benefit in kind. The value of the benefit is the amount of interest that you should have paid (based on HMRC’s official rates). Or, if you did pay some interest, the difference between what you should have paid and what you did pay.

If no provision is made then HMRC could decide to treat the loan as additional employment income and tax it accordingly, with implications for income tax and national insurance.

So how do I avoid an overdrawn director’s loan?

Here are some top tips to help you keep your director’s loan in check and prevent unwanted tax shocks.

1. Pay salary and expenses like an employee

You (hopefully) don’t pay your other employees as-and-when, so it’s good to apply that same principle to yourself as a director. Pay your salary as per the payslip amount each month. Reimburse any expenses that you’ve incurred on a monthly basis as well. Ideally at month end when you pay any other employees.

This means that any money taken out of the company over and above these payments is clearly dividends. It’s easy to see where you stand with your dividends at any point in the year, not just at year end.

2. Keep it consistent

Try to take a consistent single dividend payment from the company at the same time each month. Taking £50 here and a couple of hundred £’s there is the easiest way for the director’s loan to get out of control. It’s amazing how quickly small amounts can add up.

3. Start with a budget

Start by sitting down and working out a personal budget so you know how much you money you need each month. Then you need to look at whether this is possible with your company profits.

Your accountant can help you with the process to determine what the company can afford. They can help structure the best split between salary and dividends and also give you an idea how much tax you would pay.

4. Keep your accounts up to date

Information out is only as good as information in. If you keep your business accounts up to date on a weekly or monthly basis, it’s much easier to see how things stand with the business. This allows you to be proactive rather than reactive. You can spot if profits are dipping and maybe adjust your salary and dividends accordingly.


Treating yourself like an employee, staying organised throughout the year and planning up front with your accountant. This is the best way to maximise the tax benefits of the low salary, high dividends strategy, without getting into trouble from an overdrawn director’s loan account.

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