Is it Legal for a Director to Withdraw Funds from a Company Account?

As a director running your limited company, you may be confused by the following question: Is it legal for a director to withdraw funds from a company account? The answer is very simple: Yes, you can, as you own your own business.

The fact is, the company’s money is different from yours. It is connected to the whole business. However, how you choose to take out money matters, but you shouldn’t worry, as we are here to help you through all such situations.

Explore the key sections of this guide below or jump straight to the topic that interests you most for quick and easy navigation

• How Can a Director Withdraw Funds From a Company Account?
  
• salary payment
• Through Dividends
• Reimbursing Expense
• Director’s Loan
• What You Can’t Do?
• Want Access to Lockhart Amin Accountants?
• Wrapping up on Withdrawing Money as a Director

How Can a Director Withdraw Funds From a Company Account?

A director can withdraw money, but there are terms and conditions. The following are the main ways to take out cash from the business.

1- Salary payment

The best way to take money from the business is by paying a salary like paying your employee.

• Paying yourself a salary comes with several benefits.
• Tax Salaries help you lessen your corporation tax bill since they are a business expense.

Also, earning a salary above the Lower Earnings Limit makes you eligible for state pension contributions.

Directors use low salary payments of around £91000 tax year (2024/2025) to avoid national insurance contributions. However, they take the rest of the amount from dividends.

2- Through Dividends

Directors pay themselves dividends as this is the most tax-efficient way to withdraw funds from company accounts. So whenever your company makes a profit after paying corporation tax, you can take the money out by paying yourself as a shareholder.

However, when taking out dividends, you should follow some rules.

• Profits Only
  A director can only have dividends from post-tax profit. It means no profit, no dividends.
• Paper Documentation
  Proper documentation is essential for making a profit as a shareholder. This includes holding a director’s meeting and issuing dividend vouchers.
• They are not a Deductible Expense.
  Dividends are not considered an expense for your business, especially when you are working out for your corporation tax.

Your limited company does not need to require tax payment on dividends it issues, but the shareholders might have to pay. Dividends are subjected to dividend tax but are not liable for NICS, often making them more friendly than a salary.

3- Reimbursing Expense

You can repay business expenses from the company accounts if you have paid them with personal funds. This includes costs like travel, equipment, and software. However, you must keep the receipts and records safe for HMRC.

4- Director’s Loan

When you borrow some money from your company to have extra cash, this is termed a director’s loan. But there are some strings attached to this.

• If your director’s loan account is overdrawn and not rapid within nine months of the company’s year-end, then be ready to face an additional corporation tax bill on the outstanding amount.
• Additional interest can be charged if your loan exceeds £1000 and must be reported on your self-assessment tax return. Your limited company would also need to pay Class A National Insurance.

What You Can’t Do?

It’s important to know that you can’t treat company accounts like your personal bank account. Taking the funds out, whether it is salary, dividend or a director’s loan, can lead to

Penalties:

HMRC closely monitor the company’s finances. If they observe any improper withdrawals, it might result in tax fines or higher tax bills.

Legal Actions:

Failing to follow the instructions and procedures could lead to fiduciary duties as a director.

What is the tax-efficient way for a Director to Withdraw Funds from a Company Account?

We have discussed both ways directors withdraw money from their company accounts. Most of the time, they do so by taking out small salaries; the other way is by dividends. They consider this the most tax-efficient way to withdraw the amount. Also, this helps the director minimise NICs and Personal Income Tax and keep significant funds in their pocket.

However, talk to an accountant to avoid penalties with a safe-side withdrawal. An expert knows how to keep your side fund safe and make the process stress-free.

Want Access to Lockhart Amin Accountants?

At Lockhart Amin Accountants, we give you access to trained chartered certified accountants so that you can make confidential business decisions.

Wrapping up on Withdrawing Money as a Director

So, is it legal for a director to withdraw funds from a company account? The simple answer is yes, but only in specific ways and following the rules. Whether it’s salary, dividends, repaying expenses, or a director’s loan, each option has its legal requirements.

If you are still determining the best way to take money from your company’s account, you should consult an experienced accountant. Only a professional can help you navigate the rules and maximise your income and any unwelcome surprises from HMRC.