Shareholder salary, drawings, and the current account

The day your contracting income starts landing in a company account, a question appears that sole traders never face, which is how you actually get paid. The words that matter are salary, drawings, and the shareholder current account, and confusing them is the most common bookkeeping mess in small companies. This guide keeps them straight.

The shareholder current account, first

Think of the current account as the running ledger between you and your company. Money you put in, such as setup costs, expenses paid personally, or salary credited but not paid out, increases what the company owes you, and money you take out decreases it. Every other concept in this guide is a movement on that ledger. While the company owes you, taking money out is repayment of a debt, and nothing taxable is happening.

Drawings: what they are and what they cost

Drawings are money taken from the company outside payroll. They aren't taxed when taken, because they aren't income. They're movements against the current account. The discipline is watching the balance. If you draw more than the company owes you, the account goes overdrawn, which means you now owe the company money, and that has real consequences, covered below.

Shareholder salary: the two routes

• PAYE through the year. You pay yourself like an employee, in regular amounts with tax deducted each pay. It's tidy and predictable, and the trade-off is that you commit to an amount before you know the year's profit.
• End-of-year shareholder salary. After the year's profit is known, the company credits you a salary with no PAYE deducted. You return it as income and pay the tax yourself, which brings provisional tax obligations with it. This route is flexible and based on actual profit, and it's the reason many contractors' companies pay tax twice a year instead of every payday.

Either way, salary is taxed at your personal rates, which is why the 28% company rate only helps on profit you leave in. A common approach is to take drawings through the year for living costs, then set an end-of-year salary big enough to clear them, so the current account lands at or above zero.

When the current account goes overdrawn

If the year ends with you owing the company, because drawings ran ahead of salary and profit, the tax system treats the overdrawn balance as a loan from the company. Left interest-free, that loan is itself a benefit with tax consequences. The company should charge interest at the prescribed or market rate, or the arrangement risks fringe benefit tax or deemed-dividend treatment. None of this is unusual. It's the predictable cost of drawing more than the business earned you, and the fix is to set the end-of-year salary, or repay the balance, before the accounts close.

Three habits that keep the books clean

• Never spend from the company account personally. Transfer to your own account first, even on the same day, so the ledger stays easy to read.
• Watch the current account quarterly, not annually. If you notice an overdrawn balance in month three, you can plan around it, but if you only notice it in month twelve, it's already a problem.
• Set personal tax aside from drawings the same way a sole trader sets aside from invoices, because the end-of-year salary's tax bill is coming either way.

How Coffer fits

Coffer is built for sole traders today, and support for companies, including the shareholder current account, is on the roadmap. The set-aside discipline this guide describes is the same one Coffer automates for sole traders now. Setting personal tax aside from each drawing works the same way as setting it aside from each invoice, so the habit carries straight over.