Everyone running their own business except me probably already knows this. But, three years in, I think I’ve finally actually understood in my own mind the difference between a dividend and a director withdrawal. My accountant, Crunch1 have me record both of them when I take money out of the company, and I didn’t really get why until recently. When I finally got it, I wrote myself a note that I could go back to and read when I get confused again, and I thought I’d publish that here so others can see it too.
(Important note: this is not financial advice. If my understanding here differs from your understanding, trust yourself, or your accountant. I’m also likely glossing over many subtleties, etc, etc. If you think this is downright wrong, I’d be interested in hearing. If you think it’s over-simplified, you’re doubtless correct.)
A dividend is a promise to pay you X money.
A director withdrawal is you taking that money out.
So when a pound comes in, you can create a dividend to say: we’ll pay Stuart 80p.
When you take the money out, you record a director withdrawal of 80p.
Dividends are IOUs. Withdrawals are you cashing the IOU in.
So when the “director’s loan account is overdrawn”, that means: you have recorded dividends of N but have recorded director withdrawals of more than N, i.e., you’ve taken out more than the company wants to pay you. This may be because you are owed the amount you took, and recorded director withdrawals for all that but forgot to do a dividend for it, or because you’ve taken more than you’re allowed.
When creating a new dividend (in Crunch) it will (usefully) say what the maximum dividend you can take is; that should be the maximum takeable while still leaving enough money in the account to pay the tax bill.
In the Pay Yourself dashboard (in Crunch) it’ll say “money owed to Stuart”; that’s money that’s been promised with a dividend but not taken out with a withdrawal. (Note: this may be because you forgot to do a withdrawal for money you’ve taken! In theory it would mean money promised with a dividend but not taken, but maybe you took it and just didn’t do a withdrawal to record that you took it. Check.)