Director Salary, Dividends and Loans: keep the routes separate

A bank transfer is not a classification

Start with the reason for every amount leaving or entering the company. HMRC describes a director’s loan as money received from the company that is not salary, a dividend, expense repayment or money previously paid into or loaned to the company. The classification needs to be supported by records and the company’s underlying position, not selected after the event because it appears tax-efficient.

Use separate evidence folders and ledger codes for payroll, reimbursed expenses, dividends and director’s loan account movements. Reconcile the bank, payroll reports, dividend documentation, expense evidence and director’s loan account at least monthly. If a payment cannot be explained immediately, leave it visible as a query rather than automatically calling it salary or dividend.

• Salary or bonus: approved payroll record, pay date, payslip, Full Payment Submission and the matching company-bank entry.
• Expense repayment: receipt or other evidence, business purpose, expense-policy treatment and the matching repayment entry.
• Dividend: shareholder entitlement, accounts/profit evidence, appropriate decision record and dividend documentation before payment or crediting.
• Director’s loan account movement: date, amount, counterparty, reason, source evidence, running balance and clear indication of whether the company or director is owed money.

Salary belongs in payroll

HMRC states that directors are employees for National Insurance purposes. Director salary and bonus payments are handled through payroll, with deductions and reporting in the Full Payment Submission. HMRC’s director NIC guidance explains that calculations use annual earnings and that employers have employer NIC responsibilities, including where the director runs their own company’s payroll.

The right salary amount, payroll timing and NIC method depend on current thresholds, other income, company circumstances and wider tax facts. This guide does not calculate a salary or recommend a payment level. Maintain approved payroll records and make the associated cash commitments—pay, PAYE, NIC and pension duties where relevant—visible in the rolling forecast.

Dividends are not a substitute label for drawings

HMRC’s dividend guidance says dividends are payments to people who own shares in a company. The personal tax result depends on total income and tax band; the page checked on 27 August 2026 states a £500 dividend allowance for 2026/27 and lists tax rates that vary by band. Those figures are dated context, not a personal recommendation or a calculation for a particular director.

Before any dividend is paid or credited, ensure the company has followed the required company-law and accounting process, has the appropriate distributable profits and has documentation for the decision. These are specialist issues. Do not backdate paperwork or reclassify an overdrawn director’s loan account as a dividend without qualified accounting and legal advice.

Set a tax-year review point, not a generic pay target

Salary, dividend and loan consequences can change at the start of a tax year, when personal income changes, when the company’s profit or cash position changes, or when a director starts or stops receiving a payment. HMRC’s 2026/27 dividend page has a £500 allowance and band-dependent rates, while director National Insurance is calculated on annual earnings. Those facts illustrate why a copied salary or dividend figure is not a reliable operating rule.

Before a new tax year—or before making a material change—prepare a short factual pack for the accountant: prior payroll, expected company profit and cash, other known income, shareholder position, current director’s loan account balance, expected dividends and any change in duties or pension arrangements. The accountant can apply current thresholds and the company’s actual legal/accounting position; the director should not attempt to reverse-engineer the desired result from a generic article.

Treat the director’s loan account as a live control account

HMRC says a company must keep a record of money the director borrows from or pays into the company, commonly called the director’s loan account, and show balances in annual accounts. Track the running balance, counterparty, date, description, evidence and proposed classification for every movement. An overdrawn balance means the director owes the company; a credit balance means the company owes the director.

HMRC’s current guidance sets out potentially serious consequences where a shareholder-director owes the company, including CT600A reporting, rules connected with settlement within nine months of the end of the Corporation Tax accounting period, special associated-loan situations, benefit-in-kind implications over stated thresholds, possible corporation tax and interest, and consequences if a loan is written off or released. The facts and timing matter. Escalate an overdrawn or unclear balance to a qualified accountant promptly; do not use circular movements or last-minute labels to make it disappear.

• Book an accountant review immediately if the account is overdrawn at an accounting-period end, if the balance cannot be explained, or if a planned settlement depends on a later dividend or another loan.
• Escalate any loan above HMRC’s stated £10,000 benefit-in-kind threshold, below-official-rate interest, a planned write-off/release or any associated-loan arrangement. The rules are fact-specific and can affect both the company and the director.
• Do not backdate dividend paperwork, book a vague ‘director payment’ or make circular transfers to produce a target balance. Keep the issue visible until it has been reviewed properly.

What to do, in order

1. 1

   List all director-related cash movements

   Export the company-bank entries and record date, amount, counterparty, business purpose and supporting document.

2. 2

   Match payroll and expenses first

   Link salary/bonus entries to payroll and reimbursements to valid expense evidence before considering other classifications.

3. 3

   Reconcile the director’s loan account

   Update the live balance for every remaining movement and distinguish money owed by and to the company.

4. 4

   Review dividends with appropriate support

   Confirm the company-law, accounting and documentation requirements before paying or crediting a dividend; do not use it to repair an unexplained or overdrawn balance without advice.

5. 5

   Set a tax-year and period-end review date

   Before 6 April and before the company’s accounting-period end, provide the factual records to the accountant so current thresholds, annual director NIC and any loan-account timing can be assessed in context.

6. 6

   Escalate early

   Seek qualified advice on overdrawn balances, unclear historic transfers, remuneration changes, tax reporting or potential settlement issues.