Why mixing personal and company funds triggers unexpected tax charges for directors

Paying for personal things from the company account is not a bookkeeping annoyance. In most owner-managed companies, it creates or increases a director’s loan account, and if that loan is still outstanding nine months and one day after your company year end, the company may have to pay a section 455 charge of 35.75% on loans made on or after 6 April 2026. If the loan exceeds £10,000 at any point in the tax year and no interest, or insufficient interest, is charged, it can also create a benefit in kind, reportable on a P11D, with employer’s Class 1A National Insurance at 15% on top.

Mixing personal and business finances is one of the few areas where the tax cost is entirely avoidable and yet turns up in many sets of accounts we take over. None of this is a penalty for wrongdoing. It is simply what the rules do when money leaves the company without a clear label.

What actually happens when you use the company card

Every personal payment from the business account goes to your director’s loan account unless it is properly treated as salary, dividend, expense reimbursement or another legitimate extraction. Salary, dividends and genuine business expenses can reduce or explain the balance. Anything else builds it up.

Once the balance is overdrawn at the year end and remains unpaid past the corporation tax due date, section 455 applies. The rate rose from 33.75% to 35.75% for loans made or benefits conferred on or after 6 April 2026, following the dividend rate changes announced in the November 2025 Budget. Loans made before that date keep the old rate, so a fluctuating account can carry more than one rate at once.

That last row is the one that hurts. The money can come back eventually. It just sits with HMRC for a long time first. The GOV.UK guidance on directors’ loans sets out the basic position, but the cash flow impact is often what directors underestimate.

A common pattern

A client came to us with a property company where the director had been paying his car insurance, a family holiday and his daughter’s school fees from the company account. Nothing hidden, nothing dishonest. He had assumed it would all be sorted out as dividends at the year end.

The company had made a small profit. There were not enough distributable reserves to cover £41,000 of drawings, so most of it could not legally be voted as a dividend. The remaining balance stayed overdrawn, and the section 455 charge on the post-April portion alone was over £10,000 of cash the company did not have spare.

The fix was a mix of salary, partial repayment and much tighter monthly bookkeeping. It would have cost almost nothing to get right at the time.

Repaying and then re-borrowing does not work

HMRC anticipated this. If you repay a loan and take a similar amount out shortly before or after that repayment, the rules can stop the repayment clearing the old balance in the way you intended. The 30-day matching rule can apply where a repayment is followed or preceded by further borrowing, and separate rules can also apply to larger balances where there are arrangements or intentions to re-borrow. The point is simple: a temporary repayment just before the deadline is not a safe fix if the money comes straight back out.

Keeping the two sides apart

The practical answer is dull and effective: separate accounts, a card used only for business, and a properly maintained ledger. Running everything through Xero with monthly reconciliation means you see the loan account balance in real time rather than eleven months later.

There are wider consequences too. VAT cannot be recovered on personal spend, which is worth remembering when you check your HMRC VAT account. Mixed transactions muddy your figures, which matters now that small companies must file a profit and loss account, as our checklist for property companies explains. Sole traders face a parallel issue under quarterly reporting, covered in our note on MTD agent access for landlords.

Where client money is involved, the stakes rise sharply. Managing agents and RMC directors must keep funds ring fenced, as set out in our guide to service charge accounting and our guidance on commercial property management accounts. Directors of resident-owned companies should also read our piece on RTM annual accounts, since a personal payment from a service charge account is a far more serious problem than a messy director’s loan account.

Sort your loan account before year end

If you are not sure where your director’s loan account stands, now is a better time to find out than three months after your accounts are filed. FHP Accounting handles company tax returns, annual statutory accounts, bookkeeping and payroll, and can take the whole finance function off your hands through our outsourced finance department. Get in touch and we will review your position before the deadline does it for you.

Kellee Quigley

I lead FHP Accounting, an accountancy practice specialising in Commercial and Residential Property Accounting. Our goal is to make the administration of running property portfolios easier for landlords, managers, and investors — allowing you to focus on what you do best, while we take care of everything behind the scenes.