After converting your sole trader business into a limited company, you as a director-shareholder face a new reality: you and your company are two separate legal entities. This has significant consequences for how money moves between you and your business. The current account relationship is a widely used tool in this context, but it is also a source of tax problems if you are not familiar with the rules.
What is a current account relationship?
A current account relationship is, simply put, a running debit or credit account between you as the director-shareholder and your limited company. You borrow money from your company, or your company borrows money from you. Both directions are possible. In practice, it is most common for a director-shareholder to withdraw money from the company without any formal dividend or salary being involved. That amount is then recorded as a debt owed by the director-shareholder to the company.
This is permitted in itself, but HMRC sets clear conditions for it. If these are not followed, the tax authorities can intervene, sometimes with substantial tax assessments.
Rules you must follow
The current account is not a no-strings-attached pool of money. Commercial rules apply, comparable to how a bank would deal with an unrelated third party. The most important rules are as follows:
- Charging interest: your company must charge interest on the outstanding balance. Use a commercial interest rate comparable to what you would obtain or pay with an external lender.
- Written agreement: document the arrangements in a loan agreement specifying the term, interest rate, and repayment schedule.
- Realistic repayment: there must be a realistic prospect that you will actually repay the debt. If there is not, the tax authorities may treat the loan as a disguised dividend.
- Providing security: for larger amounts, the tax authorities expect the company to require security, such as a mortgage charge or pledge.
Sound tax advice helps you to structure these arrangements correctly from the outset, so that you are not caught off guard later.
The excessive borrowing legislation: new threshold since 2023
Since 1 January 2023, the Excessive Borrowing from One’s Own Company Act has been in force. This legislation stipulates that if your debts to your company exceed €700,000 (reference date: 31 December of each year), the excess is taxed as income from a substantial shareholding. This falls under box 2, with a rate that will increase in the coming years.
Please note: debts relating to your primary residence may be excluded under certain conditions, provided that a mortgage charge has been established in favour of the company. This is a technical point where tailored advice genuinely pays off.
When is a loan treated as a dividend?
The tax authorities scrutinise whether a genuine loan exists or whether there is a disguised profit distribution. The latter is fiscally disadvantageous: you pay tax without having formally received a dividend. Indicators the tax authorities use to assess this include:
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprek- No loan agreement has been drawn up, or the terms are unrealistic.
- Repayments are consistently not being made, even though the loan term requires them.
- Interest is being capitalised rather than actually paid, without good reason.
- The size of the debt is disproportionate to your personal assets or income.
Do you recognise one or more of these points? If so, it is sensible to have your situation reviewed. A robust administration is indispensable in this regard: without clear records, it is difficult to demonstrate at a later stage that a loan was conducted on commercial terms.
Practical tips to reduce risks
Prevention is better than cure. The following approach will help you keep the current account manageable and fiscally compliant:
- Always draw up a written loan agreement, even for smaller amounts.
- Apply a market-conforming interest rate and ensure it is actually capitalised or paid.
- Reserve the current account for short-term, temporary withdrawals — not as a structural source of financing.
- Monitor the balance regularly: if it grows unnoticed, this can have tax consequences.
- Consider dividends or salary as a structural way of extracting money from the company, rather than continually borrowing.
- Consult an adviser if the debt is approaching the €700,000 threshold.
The current account and the director-shareholder salary obligation
As a director-shareholder, you are required to pay yourself a customary salary from your company. Some director-shareholders circumvent this by borrowing from the current account instead of drawing a salary. This is fiscally risky: the tax authorities quickly view this as an avoidance of payroll tax and may issue corrections along with additional payments and penalties. The customary salary and the current account are therefore closely interlinked and require a joined-up approach.
Why Belastingadviseur Eindhoven
At Belastingadviseur Eindhoven, we understand that the transition from a sole trader business to a limited company brings a host of new tax questions. The current account relationship is one of the most underestimated of these. We are happy to think things through with you: from drafting a commercial loan agreement to optimising your director-shareholder structure. Whether you have just started out or have been working as a director-shareholder for years, we offer practical, personalised advice tailored to your situation in Eindhoven and the surrounding area.
Would you like to know how your current account stands from a tax perspective? Feel free to contact us without any obligation. We would be delighted to take a look with you.
Frequently asked questions
How much can I borrow from my limited company?
There is no statutory maximum on the amount of the loan itself, but since 2023 the Excessive Borrowing from One’s Own Company Act applies. Debts exceeding €700,000 are taxed as income from a substantial shareholding under box 2. Debts relating to your primary residence may be excluded from this if a mortgage charge has been established in favour of the company. We recommend seeking advice on what is prudent in your specific situation.
Do I have to pay interest on my debt to the company?
Yes, the company must charge a commercial rate of interest. If you do not do this, the tax authorities may treat the foregone interest at the company level as a distribution. Use an interest rate comparable to what a bank would charge for a similar loan.
What happens if I cannot repay my debt to the company?
If repayment is structurally not realistic, the loan risks being classified as a disguised dividend. The tax authorities will tax this as income from a substantial shareholding. It is important to act in good time — for example, by declaring a dividend or agreeing a realistic repayment arrangement. We recommend consulting an adviser who can look at your specific circumstances.
Can I use the current account instead of a salary?
No, this is fiscally risky. As a director-shareholder, you are required to pay yourself a customary salary. Borrowing from the current account as an alternative to salary is regarded by the tax authorities as an avoidance of payroll tax and can lead to corrections and penalties.
We are happy to think along with you. For advice tailored to your situation we would gladly sit down with you. No rights can be derived from the content of this page and it may contain inaccuracies.
