We have some clients where the shareholder has drawn funds out of the company bank account prior to sufficient dividends being available to cover the distribution. So it is worth looking at the treatment of funds drawn in different circumstances.
It should be remembered that a limited company has a distinct legal identity of its own, quite separate from its shareholders/directors. Money that is withdrawn by the owners, in whatever way, always has a tax and possibly National Insurance consequence (unless it is as a repayment of a loan from a director).
Essentially money withdrawn by shareholders/directors will be treated as:
· salaried earnings or benefits, and/or
So if you pay your private bills through a limited company what happens?
If you already have money invested in your company that has been credited to a director's loan account in your name, then the payment of a private bill can be debited to this account, reducing the amount the company owes you. In this case there is no tax consequence. (This is rarely the case for our clients).
If you do not have money invested in your company in this way, any private payments you make will create an overdrawn balance on your director's loan - you will owe the company money. Now there are tax consequences.
If your loan account does become overdrawn the following options and tax effects are available to you.
(1) You repay the overdrawn balance. If this is done as soon as the payments are made there should be no tax to pay.
(2) The company writes off the loan. The balance written off will be treated as your earnings subject to PAYE and National Insurance, or in certain circumstances, as a dividend.
(3) The director's loan remains unpaid. A benefit in kind charge will be created equal to a statutory rate of interest for the time the loan is overdrawn in a particular tax year. This benefit can be avoided if the company charges your loan account with an equivalent interest charge.
Unpaid director's loans can also create an additional corporation tax charge if the loan remains unpaid more than nine months after the company's year end. This extra tax can be reclaimed by the company when the loan is subsequently repaid, but there will be a delay.