Separating company and personal finances as a business owner

17/04/2023. I am a Director and shareholder of my own limited company. Isn’t the company money and my personal money effectively the same thing?

Simply the answer to this question is no.  However too often this can cause problems for SME business owners.  SME business owners often find the business takes over their lives; the long hours, sleepless nights, the pressure of making decisions on a daily basis.  Whilst this line between their business and personal lives can become blurred, so too can the position around the finances.

First and foremost, a limited company is a separate legal entity established under company law, independent of the individual.  There is good reason for this as it limits the liability of the shareholders amongst other commercial benefits.  This means that the transactions relating to the business remain those of the company.  This includes the company bank account.

Early stage businesses can often fall into the trap of using their personal account to run the business.  This can cause real issues as there is a responsibility on the Director to maintain appropriate accounting records.  If the Director shareholder has loaned some money to or incurred some expenses on behalf of the company then they are owed the money back from the company as a creditor.  Likewise, if the Director shareholder is deemed to have extracted (borrowed) money from the company then they are seen as a debtor of the business, and they have what is known as an overdrawn loan account.  To properly manage these types of arrangements and the other business activities of the company it is imperative that the company has its own bank account.

It is often found that more established SME businesses will also see the Director shareholder withdrawing cash, often cited as their ‘salary’.  If a salary is not processed through an appropriate payroll then these will be seen to be drawings from the company, either as salary that has not been taxed appropriately or, an increase to the Director’s loan repayable to the company or treated as dividends paid to the Director shareholder.  If treated as salary or a Director’s loan, there are likely to be tax consequences for the company. However, if supported by the appropriate dividend paperwork, then these will be treated as dividends.  Such dividends are not tax deductible payments for the company and will need to be appropriately taxed  on the individual through their personal tax return.

Problems can arise where amounts are withdrawn from the company and not cleared via any of the above means, which ultimately means this balance will need to be repaid to the company.  From a commercial perspective if the amount is outstanding at the year end then this needs to be separately disclosed in the statutory accounts filed with Companies House.  If identified before the year end, it will be worth considering if there is any sensitivity to what will be presented to the public at the year end, by leaving the amount outstanding as a loan.  Equally, if the balance remains outstanding 9 months and 1 day after the year end, then this crystallises a ’loan to participator’ charge at 33.75% of the overdrawn balance chargeable on the company which will be due for payment to HMRC alongside any corporation tax liability.  The company can reclaim this ‘charge’ in the future, following the accounting period in which the amounts have been repaid, and so there can be quite a significant timing lag on the company receiving this money back.  Finally, unless appropriate interest has been charged to the overdrawn loan (and paid), an interest-free loan can result in an employee benefit which is reportable on the annual P11D form and is subject to Income Tax and Class 1A national insurance contributions on the individual and company respectively.

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As you can see, a Director shareholder can very easily  get into trouble extracting funds from their limited company.  Please speak to us to find the best way to assist with any of the issues identified above using the contact form below.

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