What Happens If You Take Too Much Out of the Company?

Welcome to the next article in our Accounting & Tax 101 series — short, plain-English guides to help you understand the numbers that matter.

One of the biggest surprises for directors is finding out that you can’t always just take money out of your company whenever you like. If you take out more than the company can afford — or more than you’ve put in — it often ends up in something called a Director’s Loan Account (DLA). That’s where problems (and extra tax) can start.

Salary, dividends, and pensions: the safe routes

The three “clean” ways of taking money out are:

• Salary – like a normal wage, taxed through PAYE.

• Dividends – paid from profits after tax.

• Pension contributions – paid directly by the company into your pension. These reduce company profits (and Corporation Tax), but don’t count as your personal income at this time.

All three are legitimate and expected.

But what if you take out more?

If you take extra money from the company that isn’t salary, dividend, or a pension contribution, it gets recorded as a loan from the company to you.

This can happen if you:

• Pay personal expenses from the company bank account.

• Draw more cash than the company has profits to cover.

• Forgot to declare money as salary or dividend.

The tax trap (Section 455)

If your Director’s Loan Account is overdrawn at year-end (you owe the company money), the company may have to pay an extra tax charge called Section 455 tax.

• This is 33.75% of the overdrawn balance.

• It’s repayable later, but only once you’ve paid the loan back.

Why does HMRC do this? Because they see an overdrawn loan as you taking money out of the company without paying any income tax on it. Section 455 is their way of making sure the tax gets paid unless the loan is quickly repaid.

So while it’s not a permanent tax, it ties up company cash unnecessarily.

Benefit in kind

If your loan is more than £10,000, HMRC may also treat it as a benefit in kind.

Why? Because if you had borrowed that money from a bank, you would normally have to pay interest. Since you’re borrowing it from your own company (often interest-free), HMRC treats the “free loan” as extra income — and charges you tax on it, along with extra National Insurance for the company.

Why it matters

• Taking too much out can create messy tax consequences.

• You may face extra tax bills for both you and the company.

• If your company ever got into financial trouble, a liquidator would also ask you to repay the loan to the company, because that money belongs to the business, not to you.

• It can also make your accounts look weaker if lenders or investors are reviewing them.

Our advice

Try to keep drawings aligned with salary, dividends, and pension contributions. If you do need to borrow temporarily, make sure it’s repaid quickly.

Here at Accounts Action, we help directors plan their salary, dividends, and drawings in advance — so you always know how much you can safely take, without falling into the overdrawn loan trap.

This article is part of our Accounting & Tax 101 series — short guides to help you understand your accounts without the jargon.