When Taking Money Out of Your Business Becomes a Problem

It is not uncommon for company directors to take money out of their business outside of salary or dividends. This is usually recorded through what is known as a directors loan account, or DLA. In simple terms, it is a running balance that tracks what the company owes the director or what the director owes the company. This system is widely used by owner-managed businesses across the UK, but problems start when the balance becomes overdrawn and is not dealt with correctly.

If your DLA goes into the red and you owe the company money, there are immediate tax consequences. One of the most pressing issues is the Section 455 tax charge. If the loan is not repaid within nine months of the company’s year-end, the company becomes liable to pay 33.75 percent of the outstanding amount as a tax charge. While this can be reclaimed later if the loan is repaid, it still affects cash flow and ties up working capital during that period.

Directors who borrow more than ten thousand pounds from the company also run into personal tax issues. HMRC treats the amount as a benefit in kind. This means it must be declared and taxed as if it were additional income. On top of this, the company must report it through a P11D and pay Class 1A National Insurance. Interest may also be due, based on HMRC’s official rate, unless the director pays interest at a commercial rate themselves.

The situation becomes more serious if the company runs into financial trouble. When a business becomes insolvent, the overdrawn amount is treated as an asset that needs to be recovered by the appointed liquidator. That means the director will be expected to repay it, often in full, even if they are not in a financial position to do so. Liquidators are legally required to pursue this on behalf of the company’s creditors.

There is also the risk of legal claims. If the company’s finances were mismanaged or if the director continued to take funds knowing the business was struggling, they could face allegations of wrongful trading or misfeasance. This can lead to personal liability, repayment demands, or even disqualification from acting as a director in future.

To avoid getting caught out, directors need to stay on top of their loan accounts. Keeping accurate records is essential, especially when funds are moving in and out of the business. If money is withdrawn, it should be either repaid promptly or formally declared as salary or dividends, with all the correct paperwork and tax accounted for.

The longer an overdrawn DLA is left unresolved, the more complicated and expensive it becomes. If your company is already facing financial pressure, or if you are unsure about how much you owe, it is best to act early. You can find a full breakdown of the rules and repayment options in this guide from Lucas Ross.

Taking money out of your business might seem simple at the time but leaving it undealt with is what causes the real problems.