Overdrawn Dividends

Under company law shareholders must not withdraw more dividends than the company has retained profits. So what happens if you find yourself in a position where you have done just that?

The overdrawn amount will be reclassified as a loan within the company accounts and where the loan is to a director, employee or related party the following rules apply:

• If the loan is more than £5,000 then there will be a benefit in kind (BIK) charge within the income tax return every year until the loan is fully repaid
• If there is a BIK then the company will suffer a Class 1A NIC charge every year until the loan is fully repaid
• If the loan has not been repaid to the company at the point that the company is due to make its corporation tax payment (i.e. 9 months and 1 day after the company year end) then it must pay a penalty tax charge in addition to its corporation tax.

The penalty tax is 25% of the outstanding loan amount. Whilst the penalty tax will be repaid to the company once the loan is repaid, beware; there are specific rules regarding when the repayment may be claimed and it will take time to recover the monies from HMRC which can have a serious effect on the company’s cashflow.

How can you ensure you do not end up in this situation? Well the obvious answer is not to withdraw more dividends than are available. To do that you need to ensure that the company’s records are updated regularly throughout the year so that you can keep track of your profit and the estimated corporation tax that will become due.

Defacto recommend records are updated a minimum of once per month.

If you think you may have overdrawn dividends or if you need assistance with record keeping and tracking company profits throughout the year, please contact us.