When you run your own business, the lines between personal and company finances can sometimes blur, especially when you’re wearing multiple hats and juggling all sorts of responsibilities. One of the biggest mistakes some directors make (especially in limited companies) is using company funds to pay personal tax. It might seem like a harmless shortcut, but it can lead to serious consequences.
It’s one of those things many business owners in the UK do without realising the implications. So let’s break it down and look at why it’s not a good idea and what you should do instead.
What’s the Problem with Using Company Money for Personal Tax?
When you run a limited company in the UK, your business finances are legally separate from your personal finances. That means you can’t just dip into the business account whenever a personal tax bill comes around.
Here’s why it’s not a good idea:
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It Can Trigger a Director’s Loan
If you take money from your limited company that isn’t salary, dividend or a business expense, it’s considered a director’s loan. That loan must be recorded and repaid, often within nine months of your company’s year-end.
If you fail to repay it, HMRC could charge your company with a 33.75% Corporation Tax under Section 455, not to mention potential personal tax implications.
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It Complicates Your Company Accounts
Mixing personal and business finances creates confusion for bookkeeping and tax returns. You could end up overstating expenses, misreporting profits or accidentally evading tax, all of which can trigger investigations or penalties.
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HMRC Doesn’t Take It Lightly
Using company money to cover personal tax is one of the most common tax mistakes made by business owners. If HMRC sees this as an abuse of your limited company structure, they could launch an audit or apply penalties for incorrect reporting.
What You Should Do Instead
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Pay Yourself Properly
Take a salary via PAYE or declare dividends (provided the company has enough retained profit). These are the correct and tax efficient ways to move money from your business to your personal account.
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Keep a Clear Divide
Maintain separate bank accounts. Use accounting software to track personal draws and always get advice before making large withdrawals.
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Repay Director’s Loans Promptly
If you have used company funds unintentionally, log it as a director’s loan and aim to repay it within the time limit to avoid extra tax charges.
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Work With a Good Accountant
A trusted accountant can guide you on how to stay compliant with limited company finance rules and make sure you’re not putting yourself at risk.
Maintaining a clear divide between personal and business finances isn’t just about ticking boxes, it protects your company, your credibility and your future financial options. By avoiding the temptation to use company funds to pay personal tax, you’ll steer clear of unwanted HMRC attention and set a stronger foundation for sustainable growth.
Need advice on managing business finance in the UK? Whether it’s choosing the right funding option or avoiding common pitfalls, our team at Business Finance House is here to help.
