As a director of a UK limited company, withdrawing funds requires careful navigation of legal and tax rules. Taking money out incorrectly can lead to tax charges, repayment obligations, penalties, or in serious cases, director disqualification. Because a limited company is a separate legal entity, directors must comply with the Companies Act 2006, UK tax legislation, and HMRC guidance when extracting funds.
There are several lawful methods available, including salaries, dividends, director’s loans, expense reimbursements, employer pension contributions, and capital distributions on winding up. Each method has its own conditions, tax consequences, and record-keeping requirements. By following the correct procedures and maintaining accurate records, you can meet personal financial needs while protecting both yourself and your company.
A UK limited company is a separate legal person from its directors and shareholders. Company money belongs to the company, not to the individuals running it. Directors have statutory duties under the Companies Act 2006 to act in the company’s best interests and to exercise proper control over company assets.
Using company funds for personal purposes without following a recognised legal route (such as salary, dividends, or a properly recorded director’s loan) can create serious problems. Unauthorised withdrawals may be treated as loans, unlawful distributions, or breaches of director duties. Depending on the circumstances, this can lead to repayment obligations, tax charges, or personal liability.
To avoid these risks, every extraction of money must fall within an accepted legal framework and be supported by appropriate records. Whether the payment is salary, dividends, expenses, or a loan, documentation and compliance are essential to protect both the director and the company.
Taking a Salary or Bonus
Directors can pay themselves through the company payroll by taking a salary or bonus. To do this, the company must register as an employer with HMRC and operate Pay As You Earn (PAYE). Salaries and bonuses must be reported to HMRC using Real Time Information (RTI) by submitting a Full Payment Submission (FPS) on or before the payment date.
Salary payments are subject to Income Tax and Class 1 National Insurance Contributions (NICs) where applicable. Unlike dividends, salaries and bonuses are generally deductible expenses for corporation tax purposes, provided they are incurred wholly and exclusively for the purposes of the trade.
Balancing Salary and Tax Efficiency
Many sole directors choose a modest salary level to maintain entitlement to National Insurance credits while keeping Income Tax and NIC exposure low. Paying a salary around the relevant thresholds can help preserve state pension and benefit entitlement without creating unnecessary tax costs.
Accurate payroll reporting is essential. FPS submissions must be made on time and reflect the correct amounts to avoid penalties. Careful planning of salary levels can support tax efficiency while keeping the company compliant.
Paying Yourself Through Dividends
Dividends are a common way for directors who are also shareholders to extract profits from a limited company. However, dividends can only be paid from distributable profits, which are accumulated realised profits less accumulated realised losses.
Before paying a dividend, directors must ensure that sufficient distributable profits exist. The company’s articles of association govern how dividends are declared. In practice, directors usually record their decision in writing, and dividend paperwork should be created at the time of payment.
Dividend income is taxed at dividend rates rather than employment income rates. Current dividend tax rates depend on the individual’s Income Tax band and apply only to dividends received above the dividend allowance. Dividends do not attract National Insurance Contributions, which is why they are often used alongside a salary.
Declaring dividends without sufficient profits is unlawful. If an unlawful dividend is paid, the recipient shareholder may be required to repay it if they knew or had reasonable grounds to believe it was unlawful. Directors also risk breaching their statutory duties if they authorise unlawful distributions.
Using a Director’s Loan
A director’s loan occurs when a director takes money from the company that is not salary, dividends, or expense reimbursement. These amounts must be recorded in a Director’s Loan Account (DLA).
If a loan remains outstanding nine months after the end of the company’s Corporation Tax accounting period, the company is liable to a Section 455 tax charge at 33.75% of the outstanding balance. This charge is payable by the company and is refundable once the loan is repaid or written off.
If the total amount owed by the director exceeds £10,000 at any point during the tax year, the loan is treated as a benefit in kind. This can trigger Income Tax for the director and Class 1 National Insurance Contributions for the company unless interest is charged at HMRC’s official rate.
Do’s and Don’ts
✅ Do: Record all loans clearly in the Director’s Loan Account
✅ Do: Monitor balances to ensure they do not exceed £10,000
✅ Do: Repay loans within nine months where possible
❌ Don’t: Treat informal withdrawals as “temporary” without records
❌ Don’t: Ignore tax consequences of outstanding balances
If the company becomes insolvent, director’s loans are closely scrutinised. Repayments or withdrawals may be challenged by a liquidator if they amount to a preference or a transaction at an undervalue.
Claiming Expenses and Reimbursements
Directors can be reimbursed for legitimate business expenses incurred on behalf of the company. For tax purposes, expenses must be incurred wholly and exclusively for business purposes to be deductible for the company.
Some expenses are covered by statutory exemptions, meaning no tax is due and no P11D reporting is required. Other expenses may still need to be reported unless they are payrolled or covered by a specific exemption. Whether an expense must be reported depends on its nature and how it is reimbursed.
Accurate records are essential. Receipts, invoices, and explanations should be retained to demonstrate that expenses were genuinely business-related. Incorrect or unsupported claims can result in tax liabilities and penalties.
Common Allowable Expenses
Business travel such as train fares
Accommodation for business trips
Professional subscriptions relevant to the business
Office supplies and equipment
Making Employer Pension Contributions
Employer pension contributions are a tax-efficient way for a company to provide value to a director. Contributions paid directly by the company into a registered pension scheme are generally deductible for corporation tax purposes, provided they are made wholly and exclusively for the purposes of the business.
There is no Income Tax or National Insurance charge on the director at the time the contribution is made, provided contributions remain within the individual’s pension allowances. This makes employer pension contributions an effective alternative to dividends, particularly for directors seeking long-term financial planning.
Companies should ensure contributions are properly documented and supported by business rationale. Pension providers should also be consulted to confirm scheme eligibility and contribution limits.
Capital Distributions on Winding Up
When a solvent company is closed, remaining funds can be distributed to shareholders through a Members’ Voluntary Liquidation (MVL). This process is governed by the Insolvency Act 1986 and requires directors to make a statutory declaration of solvency confirming that all debts can be paid within 12 months.
Distributions made during an MVL are typically treated as capital rather than income. This can result in more favourable tax treatment compared with dividends. Qualifying shareholders may be able to claim Business Asset Disposal Relief, subject to the relevant conditions and the applicable Capital Gains Tax rate at the time of disposal.
An MVL must be conducted by a licensed insolvency practitioner. Following the correct legal process is essential to avoid personal liability and to ensure distributions are taxed correctly.
Common Penalties and Pitfalls to Avoid
Directors frequently encounter compliance issues when extracting money from their company. Late or incorrect PAYE submissions can result in HMRC penalties. Inaccurate tax returns may attract penalties based on the behaviour and seriousness of the error.
Paying dividends without sufficient distributable profits is a common mistake and can lead to repayment obligations. Serious misconduct, such as misusing company funds or breaching insolvency rules, can result in director disqualification under the Company Directors Disqualification Act 1986, with bans of up to 15 years.
Common errors include:
Paying dividends without checking profits
Leaving director’s loans outstanding beyond nine months
Failing to operate PAYE correctly
Good record-keeping and prompt corrective action are key to avoiding these risks.
Essential Reporting and Deadlines
Meeting statutory deadlines is critical to staying compliant:
PAYE / RTI: FPS submissions on or before each payment date
P11D: Submit by 6 July following the tax year end (where required)
Self Assessment: File personal tax returns by 31 January
CT600 filing: Submit within 12 months of the accounting period end
Corporation Tax payment: Generally due nine months and one day after the accounting period end
Dividend paperwork: Prepare at the time dividends are paid
FAQs
1) What is a close company?
A close company is broadly one controlled by five or fewer participators, or by any number of participators who are also directors. This classification affects how certain tax rules apply, particularly director’s loans.
2) How do I handle multiple director’s loans at once?
All advances and repayments should be recorded in the Director’s Loan Account. Monitor total balances carefully and aim to repay amounts within nine months of the accounting period end.
3) Can I pay dividends if the company made a loss?
Dividends can only be paid from accumulated distributable profits. If there are insufficient profits overall, dividends must not be paid.
4) What if I can’t repay a director’s loan by the deadline?
If the loan is still outstanding nine months after the accounting period end, the company must pay a Section 455 tax charge. This charge is refundable once the loan is repaid.
5) Are home office expenses allowed?
Yes, provided they are genuinely incurred for business purposes. Claims must be reasonable, proportionate, and supported by records.
6) How do partial-year salaries work?
PAYE applies in the normal way. Tax and NIC are calculated based on earnings paid, and FPS submissions must reflect the actual amounts.
7) Is it cheaper to be paid entirely by dividends?
Dividends can be tax-efficient but are paid from post-tax profits and provide no National Insurance credits. A mixed approach is often used.
8) Can I skip paying myself a salary?
Yes, but doing so may affect National Insurance credits and evidence of income for lenders or benefit purposes.
9) What if the company is insolvent but I need money?
When insolvent, directors must prioritise creditors. Taking money out can lead to personal liability and disqualification.
10) How often can dividends be paid?
Dividends can be paid whenever there are sufficient distributable profits, provided each payment is properly considered and documented.
11) Does Section 455 apply to loans to family members?
Section 455 can apply where loans are made to participators or associates, depending on the circumstances and company structure.
12) Can I be forced to repay unlawful dividends personally?
A shareholder who receives an unlawful dividend may be required to repay it if they knew or had reasonable grounds to believe it was unlawful.
13) Will HMRC ignore small director’s loans?
All loans must be recorded and monitored, regardless of size. Compliance depends on proper treatment, not the amount involved.
14) What records should I keep for expenses?
Keep receipts, invoices, and explanations showing that expenses were incurred for business purposes.
15) Can I use a credit card for business expenses?
Yes, provided expenses are genuinely business-related and properly documented.
Your Next Step
To extract money legally and efficiently, choose the method or combination of methods that fits your company’s profitability and your personal needs. Keep detailed records, monitor deadlines closely, and act quickly if issues arise. Professional advice from a qualified accountant or licensed insolvency practitioner can help ensure your approach remains compliant and tax-efficient under UK law.
