A limited company's bank balance is the company's, not the director's. Money taken that is not salary, dividend or expense reimbursement is a loan, and loans have consequences.
The single most common misunderstanding among first-time company directors is about whose money is in the business account. Incorporation creates a separate legal person, and every pound in the company belongs to it. There are three legitimate routes for money to reach you — salary through payroll, dividends out of distributable profits, and reimbursement of genuine expenses — and anything else is a loan from the company to you, recorded in the director's loan account.
An overdrawn account is not illegal and is not by itself a problem. What it is, is a chargeable event on a timetable, and the timetable is the part people miss.
The Three Consequences
- A corporation tax charge on the company where the loan is still outstanding a set period after the end of the accounting period. The charge is temporary: it is repaid to the company once the loan is cleared, but the refund comes back slowly, well after the repayment. This site does not publish the rate or the exact deadline — get both from your accountant, because they drive the whole decision.
- A benefit in kind on you where the loan exceeds a threshold and is interest-free or below a set rate. That is reported on a P11D and taxed as employment income — see benefits in kind.
- A write-off is taxable. If the company simply forgives the loan, the amount written off is generally taxed on you as income, which is usually the worst of the available outcomes.
Repaying and immediately redrawing does not work. There are anti-avoidance rules aimed at exactly that pattern, treating a repayment followed by a fresh withdrawal within a short window as though the original loan was never repaid. It is known as bed and breakfasting, HMRC has seen it many times, and the rules are specific.
How Balances Build Up Without Anyone Noticing
| What happened | Why it lands in the loan account |
|---|---|
| Regular drawings taken as needed | Not processed as salary or dividend |
| Dividends voted without distributable profits | Unlawful distribution, reclassified as a loan |
| Personal spending on the company card | Not a business expense |
| Taking money before the year's profit is known | Provisional, and sometimes never regularised |
| Company paying a personal bill | Same effect as a cash withdrawal |
The second row is the serious one. Dividends can only be paid from accumulated realised profits, and a dividend declared where there were none is not a dividend at all — it is treated as a loan, retrospectively, often discovered when the accounts are prepared months later.
Clearing an Overdrawn Account
- Repay it in cash before the deadline. The cleanest route, and the only one with no tax cost.
- Declare a dividend to clear it, if there are distributable profits. That creates a dividend tax charge at your rate but removes the corporation tax charge.
- Vote a bonus through payroll, which attracts income tax and National Insurance but is deductible for the company.
- Offset amounts the company owes you, such as unreimbursed expenses or a genuine loan you made to the company.
Which is best depends on your marginal rates, the company's profit position and the timing. Our guide to how income is structured compares salary, dividends and capital routes; the point specific to a loan account is that doing nothing is the only option that reliably costs money.
Loans the Other Way
Directors frequently lend money to their company, particularly at the start. That creates a credit balance, which can be repaid to you free of tax because it is a return of your own capital. It is worth documenting properly, because an undocumented credit balance is difficult to prove years later and is exactly the kind of item an enquiry probes — see what triggers an HMRC enquiry.
If You Are Winding the Company Up
An overdrawn loan account must be dealt with before a company can be closed. A liquidator will pursue it as an asset of the company, and it cannot simply be written off on the way out. Anyone planning to close a company before emigrating should clear the balance well in advance, because discovering it during a liquidation is both expensive and slow.
Frequently Asked Questions
Is it illegal to take money out of my company as a loan?
No. An overdrawn director's loan account is lawful, provided it is properly recorded. What it creates is a corporation tax charge if it is still outstanding after the deadline, and possibly a benefit in kind.
Do I get the corporation tax charge back?
Yes, once the loan is repaid, but the refund comes back well after the repayment rather than immediately. Ask your accountant for the current rate and timing, which drive the whole decision.
Can I repay the loan and take it out again?
Not effectively. Anti-avoidance rules treat a repayment followed by a fresh withdrawal within a short window as though the original loan was never repaid. HMRC is very familiar with the pattern.
What if the company writes the loan off?
The amount written off is generally taxable on you as income, which is usually the worst available outcome. Clearing the balance with a dividend or a bonus is normally better.
Related Guides
Keep reading with these related guides and calculators:
- How income is structured — salary, dividends or capital
- Benefits in kind — the beneficial loan charge
- Closing a company — clearing the balance first
- Sole trader or company? — whether to incorporate at all
- What triggers an enquiry — why documentation matters
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