Drawing money from your own company must be approached with care to ensure that you are not breaking the law and that you are complying with all the rules.

There are currently 5.58 million SMEs active in the UK. Of these businesses, many directors may wonder what exactly they are legally allowed to do when it comes to drawing down money from their company. The rules around it may be confusing at first, but this article aims to explain how drawing down money from your company works.

How Can Directors Draw Down Money From Their Company?

Salary

Directors can receive a salary for their services to the company, just like any other employee. The company will deduct income tax and National Insurance contributions (NICs) from the salary at source before paying it to the director.

Dividends

Directors who are also shareholders can receive dividends from the company’s profits. To issue dividends, the company must hold regular board meetings, document the decision to pay dividends and distribute them to shareholders in proportion to their ownership.

Loans

Directors can borrow money from the company in the form of a loan (Source: Harpsey). These loans can be interest-free, low-interest, or at a commercial rate. There are specific tax rules surrounding director loans to prevent tax avoidance.

Do Directors Need to Register Their Drawdown of Money?

Yes, you need to maintain accurate and transparent financial records. When directors draw down money, it should be documented in the company’s financial records, clearly indicating the purpose of the withdrawal and the method chosen (salary, dividends, or loan).

What Are the Tax Implications of Drawing Down Money From the Company?

Salary

Directors will pay income tax and NICs on their salaries. The tax rates depend on the director’s overall income and the tax band they fall into.

Dividends

Dividends are subject to dividend tax rates. As of my last update in September 2021, there’s a tax-free dividend allowance, and after that, tax rates increase with the amount of dividends received. The exact rates can change, so it’s important to check the latest information.

Loans

If the director wants to borrow money from the company interest-free or at a low-interest rate, there might be tax implications on the difference between the market interest rate and the actual rate charged. The company could be liable to pay tax on this difference, and the director might also face tax consequences.

Can the Drawdown of Money Be Considered a Shareholder Loan?

Sometimes. If the director borrows money from the company and does not follow the typical salary or dividend procedures, it can be treated as a shareholder loan. This means the director owes the company the borrowed amount and might need to repay it within specific timeframes to avoid potential tax charges.

Are There Specific Rules for Director Loans?

Yes, HM Revenue & Customs (HMRC) has specific rules for director loans to prevent tax avoidance. If a director’s loan exceeds £10,000 at any point during the year, the company needs to report it on its Corporation Tax return (CT600).

If the loan is interest-free or has a low-interest rate, there might be tax implications on the difference between the market rate and the rate charged. If the loan is not repaid within nine months of the company’s accounting year-end, the company could face additional tax charges.

What Are the Potential Benefits of Drawing Down Money as Dividends?

Drawing down money as dividends can provide tax advantages due to the dividend tax allowance. However, it’s essential to ensure the company has sufficient distributable profits to pay dividends legally. Distributable profits are calculated based on the company’s accumulated profits, assets, and liabilities.

How Often Can Directors Draw Down Money From the Company?

It depends. The frequency of drawing down money depends on factors like the company’s financial health, its profit levels, and the director’s financial needs. Drawing down money too frequently could impact the company’s cash flow and financial stability.

Excessive withdrawals of money from the company can weaken its financial health. If the company’s profits aren’t sufficient to support the withdrawals, it could lead to financial instability, affect its ability to meet obligations, and even potentially lead to insolvency.