Is it Legal to Transfer Money From a Business Account to a Personal Account

Running a business involves managing finances and ensuring that funds are allocated appropriately. This can be tough when you are managing multiple bank accounts, debits cards and credit cards. We are all susceptible to the odd lapse in concentration when using the wrong account or card. 

If this has happened to you, then you are right to ask whether it’s legal to transfer money from a business account to a personal account, whether to rectify a mistake, or as a dividend. 

This guide explains when you can transfer funds from a business account to a personal account legally, and what you need to know. 

Is it legal to transfer money from a business to a personal account?

As a business owner, you may find yourself wondering about the legality of transferring money from your business account to your personal account in the UK. If you have been left confused as a business owner about the ramifications of whether ‘is it legal to transfer money from a business to a personal account?’ here’s the simple answer: 

It is legal to transfer money from a business account to a personal account if done to pay your salary, dividends, reimbursing expense payments, and potentially a loan to/from Directors. These are all bona fide and legitimate reasons for transferring funds from a business account to a personal account. 

Whilst that is the simple answer, each comes with their own tax and reporting requirements. 

So, the short answer is yes you can legally transfer money from a business account to a personal account but the tax, accounting, and disclosure requirements of why you have transferred money to a personal account will provide guidance on what you need to do from a reporting point of view and the tax consequences of such a transaction. 

We have covered various scenarios below to help you understand what to do when transferring money from a business account to a personal account.

Transferring funds from a business account to a personal account

One common question that arises is whether it is permissible to transfer funds from a business account to a personal account. Generally, it is not recommended to mix personal and business funds, as this can create accounting complexities and risk. 

However, there may be certain circumstances where such transfers are allowed. We explain each of these in more detail below:

Paying a salary (if a limited company)

If you are a Director/Shareholder of a limited company, you will probably have been advised by your accountant that a tax efficient way to remunerate yourself will be through paying yourself a salary as an employee.

If you are unsure whether this has been optimised check out our guide on how much should a small business owner pay themselves.

If you operate a PAYE scheme both yourself and the company may pay National Insurance, pension contributions and you may pay PAYE income tax. The net amount owed to you can be transferred from the business bank account to your personal account as your net salary payment.

Receiving dividends (if a Limited company)

Provided your limited company is profit making and you are a shareholder in the business it the Directors can vote a dividend to be paid to distribute the profits after corporation tax to the shareholders.

There are many rules and regulations around the distribution of profits and dividends so make sure you are aware of your responsibilities as a director of a limited company.

You may also wish to consider what is an unlawful dividend to make sure you are adhering to the rules when transferring money from a business account to a personal account.

When a dividend is voted it can be paid from the business bank account to your personal bank account. This money is yours to spend. Please bear in mind that this dividend income is paid gross i.e., no personal income tax has been deducted so you will need to declare this on a Self-Assessment tax return. It might therefore be sensible to put some money aside to pay your personal tax bill.

Taking drawings (if a Sole Trader)

A Sole Trader pays tax based on the profits of the business regardless of how much money they have drawn from the business. The process of paying yourself some money from the business bank account into your personal bank account is called ‘drawings’ and this will be recorded in the business accounts as such.

The business profits are the figure used when calculating your Self-Assessment personal income tax liability at the end of the tax year and not the amount you have drawn from the business.

Reimbursing business expenses

You would normally cover business expenses from the business account but there may be occasions when you have used personal money to pay for business items. If these are legitimate business expenses, you are perfectly entitled to reclaim this money. 

Examples include business mileage carried out in your personal car, train tickets for a business meeting where the payment method is linked to your personal account.

The business costs will need to be recorded in the accounting records of the company and then you can be reimbursed through payment from the business bank account into your personal account.

Directors loan transactions (if a limited company)

When starting a limited company, you may have made a loan to the limited company to get it started. This will be recorded in the company accounts as money owing to you the Director. It is perfectly acceptable when the company has sufficient funds to repay some or all that loan. This is a situation where you would be transferring money from a business account to a personal account.

If you repay a director loan, make sure it is recorded by your accountant or bookkeeper as such to avoid it being treated as taxable income. 

Check out our guide on putting personal money into a limited company to make sure you get this bit right.

On the flip side there may be occasions when you take a loan from the business. This is legal so you can transfer money from the business account to a personal account but you need to know that there are several tax and reporting consequences of doing so which we cover in detail in can a limited company lend money to an individual and this can end up being an expensive way to borrow money.

When the owner takes money from the business for personal use?

Business owners often invest their own funds into the business during its inception or to support its growth. In such cases, it is typically acceptable to withdraw money from the business account to reimburse yourself for initial loan. If the funds were recorded as Share Capital and not a loan to the business, then that is a completely different set of rules. However, it is advisable to maintain proper documentation and consult with an accountant to ensure compliance with tax regulations.

Can I take money out of my business for personal use as a sole trader?

As a sole trader, you are the sole owner of your business, and there is no legal distinction between personal and business finances. Therefore, you can withdraw money from your business account for personal use, as long as you accurately report your income and expenses for taxation purposes.

How to take money out of a company without paying tax in the UK?

In the UK, businesses are subject to various tax obligations. While it may not be possible to completely avoid taxes, there are legal methods to minimise tax liabilities when withdrawing money from a company. Consulting with a tax professional is crucial to explore strategies such as salary, dividends, or tax-efficient reimbursements, depending on the company structure and individual circumstances.

FAQs on transferring money from business account to personal accounts

How long does it take to transfer money from my business account to personal account?

Using the UK Faster Payment Service which is used sending electronic sterling payments in the UK if the receiving bank uses Faster Payments too, then the payment will arrive almost immediately.

If using a bank such as Starling, it is almost instantaneous, and you will get an app notification as soon as the cash has landed and your online accounting software gets updated at the same time. No more excuses not to keep your books and records up to date.

How to withdraw money from a business account for personal use?

To ensure compliance with legal and accounting standards, it is important to follow proper procedures when withdrawing money from a business account for personal use. Consider these steps:

a. Maintain separate accounts: Keep your personal and business finances separate by maintaining distinct bank accounts. This separation will help maintain clarity and transparency in your financial records.

b. Document transactions: Accurate and detailed documentation is vital. Record the purpose of the transfer, the amount withdrawn, and any supporting documents that validate the transaction.

c. Consult with professionals: Seek advice from an accountant or financial advisor who specialises in business taxation. They can guide you on the most appropriate and tax-efficient ways to withdraw funds from your business account.

Can a director withdraw money from a company account?

Directors are responsible for managing the affairs of the company and may need to withdraw funds for various reasons. However, it is crucial to exercise caution and ensure that any withdrawals are made in compliance with legal and accounting requirements. Directors must act in the best interests of the company and avoid any potential conflicts of interest.

Money paid into personal account instead of business?

In certain situations, customers or clients may mistakenly deposit funds directly into a personal account instead of the business account. If this happens, it is important to rectify the error promptly by transferring the funds to the appropriate business account. Keeping a record of such transactions and notifying the client or customer about the correct account details can help prevent future occurrences.

Director using company money for personal use

Using company funds for personal expenses is generally not permissible unless properly authorised. Directors have a fiduciary duty to act in the best interests of the company, and misusing company funds for personal gain can lead to legal consequences. It is crucial to separate personal and business finances and only withdraw funds according to the established legal procedures.

Personal expenses paid from the business account should be recorded in the Directors loan account and treated as money owing to the business. There will be tax and reporting consequences of such a transaction.

Conclusion

Transferring money from a business account to a personal account in the UK can be legally permissible under certain circumstances. However, it is essential to consult with professionals, such as accountants and tax advisors, to ensure compliance with relevant laws and regulations. 

Maintaining accurate records, following proper procedures, and avoiding any misuse of company funds are crucial for maintaining financial integrity and legal compliance in your business endeavours.