We often get asked this question, and the official answer is you should either save up personal funds to pay your tax bill, or withdraw the funds from your business as a dividend. Then pay your tax bill to HMRC from your personal account.
However, we do know in reality this is a bit of a faff (and not many people save as they go), and many directors will pay their personal tax bill from the company bank account. So where do you stand if this is what you do?
Implications of paying your personal tax through your company
So if you do pay it from your company bank account this payment will need to go to the Directors Loan account when you reconcile it. It will then increase the value of loans that directors have taken from the company.
At year end, the directors loan account is usually cleared by declaring dividends, as a directors loan should be cleared within 9 months of the company year end in order to avoid having to pay tax on the loan.
There is a tax free allowance of £2,000 for dividends and dividends received after that are taxable.
You can read more about Directors Loans here.
How do I avoid this?
One way to avoid adding to your directors loan is to budget for your tax bill and save the required amounts. We can help you to do this as part of our budgeting service – we would plan out the amount you can withdraw from the business, including planning and saving for your personal tax bills. If you’d like to know more about budgeting and planning for those personal tax bills (and other bills and eventualities) pop over to our Work With Us page, complete the quick questionnaire and book a discovery call with us.