Many directors take funds from their company without fully understanding how these withdrawals are classified. Any movement of money between a director and the company must be properly recorded. Company money is not the director’s money, even if they are the sole shareholder. And just because there’s cash in the bank doesn’t mean it’s available to take freely.

Directors have a legal responsibility to ensure creditors are paid before taking money for themselves. Shareholders’ interests come after the company’s obligations have been met.

 

How Directors Can Extract Money

Directors typically take funds from the company in three ways:

Salary – subject to PAYE and National Insurance, usually up to the director’s personal allowance (£12,570 for the 2025/26 tax year) to make use of tax-free income efficiently before considering dividends or other withdrawals.

Dividends – payable only from retained profits or distributable reserves.

Loans – any withdrawals that are not salary or dividends are treated as a loan through the Director’s Loan Account.

 

Understanding  Director’s Loan Accounts

A Director’s Loan Account (DLA) records all money a director takes from or puts into the company outside of salary or dividends. It tracks loans, repayments, personal contributions, and business expenses paid personally.

An overdrawn DLA occurs when a director withdraws more than they have contributed to the company.

Items that increase the amount the company owes the director include:

Salary payments

Dividends received

Expenses paid personally on behalf of the company

Money paid into the company

 

Items that decrease the amount the company owes the director include:

Drawings or personal spending on company cards

Repayments of previous loans to the company – for example, if you paid some capital into the company and are now taking it back

If the decreasing items exceed the increasing items, the DLA is overdrawn, meaning the director owes money to the company.

 

Implications of an Overdrawn DLA

Interest and Benefit-in-Kind

If the overdrawn loan exceeds £10,000, HMRC requires interest to be charged at the official rate. This interest can either be paid into the company by the director or the DLA can be adjusted by the interest amount.

If no interest is paid and the DLA isn’t adjusted to account for any interest owed, the loan is treated as a P11D benefit-in-kind. This means the director receives a taxable benefit, reported on a P11D form and taxed as part of their personal income. The company must also pay Class 1A National Insurance at 15% (for 2025/26) on this benefit.

The taxable amount is calculated as the difference between HMRC’s official interest rate and any interest actually charged, applied to the overdrawn loan balance.

Section 455 Tax

If the DLA is not repaid within nine months after the year-end, the company incurs a 33.75% Section 455 tax charge on the outstanding amount.

This charge is in addition to corporation tax but is refundable once the loan is repaid. Refunds can be claimed nine months and one day after repayment.

 

Clearing Overdrawn Loans

Common strategies include declaring dividends or adjusting salary to cover the overdrawn amount — provided there are sufficient reserves.

If reserves are insufficient, dividends cannot be declared, and repayment must be made directly to the company. Declaring dividends without adequate reserves is illegal.

 

What ‘Sufficient Reserves’ Means

Sufficient reserves are determined by the company’s balance sheet, which lists:

Assets: cash in the bank, debtors, fixed assets, etc.

Liabilities: loans, creditors, tax obligations, and other debts

If liabilities exceed assets, the company does not have enough reserves to pay dividends. Creditors must always be satisfied first, and shareholders cannot receive dividends if the company cannot cover its liabilities.

 

Best Practice Recommendations

Keep accurate and up-to-date accounting records to determine whether dividends or DLA withdrawals are permissible.

Review the balance sheet and reserves before declaring any dividend.

Document board approval for all dividends and prepare dividend vouchers.

Repay overdrawn DLAs within nine months after the year-end to avoid S455 tax charges.

 

Conclusion

Getting director withdrawals wrong can be costly — not just in tax, but also in compliance risk and cashflow strain. Overdrawn loan accounts, illegal dividends, and unexpected tax charges under Section 455 or P11D can all create unnecessary problems for both the company and its directors.

By keeping accounting records current, monitoring reserves carefully, and taking professional advice before extracting funds, directors can ensure they draw money from their company legally, efficiently, and with full visibility of the tax implications.

 

How We Help

At de Jong Phillips, we help directors structure withdrawals in a way that supports both personal tax efficiency and corporate compliance — so your business and personal finances stay in sync.