Salary, Dividends and Drawings When a Company Is Struggling
How to distinguish salary, expenses, dividends and director's loan transactions during financial distress.
Published by Hedwyn Ltd. General information for directors of companies registered in England and Wales.
Does this sound familiar?
You normally take a small salary and dividends, but profits or cash have fallen. Personal expenses have gone through the company. You are unsure whether money already taken is pay, a dividend, an expense repayment or a director's loan.
The short answer
These payments are not interchangeable. Salary normally follows payroll and employment-tax rules. Expenses require a genuine business basis and records. Dividends require the correct corporate process and sufficient distributable profits. Other withdrawals may be recorded through a director's loan account.
When the company is under pressure, directors should stop relying on historic habits and establish exactly what each payment represents.
What may be urgent
- Reconcile each director's loan account
- Check whether dividends were properly declared from available profits
- Ensure payroll and expense records are current
- Review payments to directors alongside creditor interests
- Obtain tax and insolvency advice before correcting or offsetting balances
What to avoid
- Backdating dividend vouchers, minutes or payroll
- Calling a withdrawal an expense without evidence
- Declaring dividends solely because cash is in the bank
- Repaying directors without considering other creditors
- Assuming an accountant can retrospectively make every withdrawal lawful
Information to gather
- Payroll records and employment terms
- Dividend vouchers, board minutes and accounts distributable reserves
- Expense claims and receipts
- Director's loan account ledgers
- Bank and credit-card statements
- Latest management and statutory accounts
Options that may be considered
The records may need to be corrected prospectively, genuine expenses documented, remuneration reviewed, or an overdrawn loan addressed. Tax, company-law and insolvency consequences overlap, so directors should obtain advice before implementing a solution.
What happens next?
Read the overdrawn director's loan account guide, review preferential payments, or complete the confidential assessment.
Authoritative sources
- GOV.UK: salary, expenses, dividends and director loans
- HMRC Company Taxation Manual: loans to participators
This guide provides general information for directors of companies registered in England and Wales. It is not legal, financial, accounting, tax or insolvency advice.
This guide is general information, not legal, financial, accounting or insolvency advice. See how our content is prepared.