What Happens if Your Shareholder Current Account is Overdrawn – And How to Fix It

If you're a small business owner trading through a company, you probably have a shareholder current account – even if you don’t realise it! This is simply the record of money flowing between you and the company. Ideally, this account should stay in the black (positive balance), but sometimes it goes the other way – and that's where problems can start.

What Is an Overdrawn Shareholder Current Account?

An overdrawn shareholder current account means you've taken more money out of the company than you've put in. It often happens when:

• You withdraw funds personally without declaring them as a shareholder salary, wages or dividends.

• The company pays personal expenses on your behalf.

• You take drawings instead of salary, expecting future profits to balance things out.

It’s common, but it can have tax and legal consequences if left unchecked.

Why Is It a Problem?

1. You Owe the Company Money

An overdrawn account is essentially a loan from your company to you. If your business ever needs to be liquidated, the liquidator will chase you to repay that loan.

2. Interest is Charged at IRD Rates

Since the company is effectively lending money to you as a shareholder, IRD requires that interest is charged on the overdrawn balance. This is set at the Use of Money Interest (UOMI) rate, which changes periodically (and is usually higher than bank rates).

But here’s the important part – this interest isn’t actually paid to IRD. Instead, it’s recorded as an accounting entry each year.

How the Interest Journal Works

• The company records the interest as income (because technically, it has ‘earned’ interest on the loan to you).

• You, as the shareholder, have this interest added to your current account balance, increasing the amount you owe. It’s effectively treated like a drawing.

This means that even if you don’t make further withdrawals, the debt keeps growing each year due to the interest charge.

3. Fringe Benefit Tax (FBT) Could Apply

If your overdrawn balance is more than $10,000 at any time during the year, and no interest is charged, IRD may view it as an interest-free loan, meaning your company could be hit with fringe benefit tax (FBT). Charging interest at the IRD rate can help avoid this issue.

4. IRD Scrutiny

If your company isn’t making enough profit but you’re still taking cash out, IRD may question whether this is a genuine business operation or a way to avoid tax.

How to Fix It

The good news? There are several ways to get your shareholder current account back on track. This is a super complicated area of accounting, so please make sure you get advice specific to your situation - but the below solutions could be some great talking points to discuss with your accountant!

1. Make a Profit – And Leave It in the Business

If your business starts making more money, the company can use those profits to repay the overdrawn amount. The key here is not drawing more funds before the balance is settled.

2. Declare a Dividend

If the company has retained earnings, you could declare a dividend to offset the debt. However, dividends come with tax implications – they are taxable to you personally, and imputation credits may be needed to reduce extra tax costs. You will also have to pay the withholding tax the month after the dividend is declared.

3. Introduce Personal Funds into the Business

You can repay the debt yourself by putting money back into the company. This could be done as a direct repayment or through personal assets being transferred into the business.

4. Pay yourself a salary instead of taking Drawings

Instead of taking drawings, consider paying yourself a salary through PAYE. This ensures taxes are taken care of upfront and prevents the shareholder account from going further into the red.

5. Wind up the company (Carefully!)

If you're shutting down the business and there are capital gains (such as goodwill or untaxed retained earnings), these could be distributed tax-efficiently as capital distributions rather than dividends. However, professional advice is crucial here to avoid unexpected tax consequences. You can learn more on winding up a company here.

6. Set Up a Formal Loan Agreement

If repayment isn’t immediate, a formal loan agreement with an interest charge can reduce FBT exposure. This approach turns the overdrawn amount into a structured debt with terms.

Final Thoughts

An overdrawn shareholder current account isn’t the end of the world, but it needs to be managed to avoid tax headaches and legal risks. If you're in this situation, the best approach is to plan how to clear the balance sooner rather than later. Whether it’s by making a profit, restructuring payments, or injecting personal funds, there’s always a way forward.

Got questions about your shareholder current account? Let’s chat – we can help you sort it out before it becomes a bigger issue.