Who is liable for debts in a limited company?

If your limited company owes money – particularly to HMRC – it’s natural to wonder whether those debts could end up landing on you personally.

A company limited by shares is a separate legal entity, which means its debts belong to the company, not to you. On top of that, the liability of each shareholder is limited to the amount they’ve agreed to pay for their shares – and it’s that combination of separate legal identity and limited liability that gives directors and shareholders the protection most people associate with incorporating.

However, limited liability isn’t a blanket shield, and HMRC has specific powers to pursue directors personally in some cases, including National Insurance contribution (NIC) debts linked to fraud or serious neglect, and separate rules for PAYE where the statutory conditions are met.

Read on to learn more about personal liability, how your remuneration and director’s loan account come into play, and what you can do to protect yourself.

Who is liable for debts in a limited company?

A limited company is a separate legal entity from its directors and shareholders. That means its debts and company taxes like Corporation Tax, VAT, and PAYE all belong to the company.

If you’re also a shareholder, which most owner-managed company directors are, your liability as a shareholder is limited to any amount unpaid on your shares. For most companies, shares are fully paid at their nominal value, usually £1 per share, so there’s nothing further to pay in that capacity.

That said, directors can become personally liable for company debts in a number of specific situations, including:

• Personal guarantees – if you’ve personally guaranteed a company loan, lease, or credit facility, the lender can pursue you directly if the company defaults.
• Overdrawn Director’s Loan Account (DLA) – if you owe money to the company through your DLA and the company enters insolvency, a liquidator will pursue you for repayment.
• Wrongful trading – under Section 214 of the Insolvency Act 1986, if you kept trading when you knew (or should have known) there was no reasonable prospect of avoiding insolvent liquidation, and you didn’t take every step to minimise losses to creditors, a court can order you to contribute personally.
• Fraudulent trading – under Section 213 of the same Act, where a company’s business has been carried on with the intent to defraud creditors. This carries a heavier burden of proof and can also lead to criminal liability under Section 993 of the Companies Act 2006.
• Failure to pay NICs or PAYE debts – HMRC has specific powers to transfer certain NIC liabilities to directors through PLNs, and separate rules can apply for PAYE debts in director cases.

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When can HMRC pursue a director personally?

Where HMRC believes a director’s fraud or serious neglect led to unpaid NICs, or where specific PAYE transfer-of-liability conditions are met, it can pursue the director personally for those debts.

It has several statutory mechanisms to do this, and it’s been using them more frequently in recent years.

PLNs

A Personal Liability Notice (PLN) is the main way HMRC can move unpaid National Insurance debts from the company onto a director personally.

It’s issued under Section 121C of the Social Security Administration Act 1992 and applies where HMRC believes the failure to pay NICs was due to the director’s fraud or neglect. HMRC’s own guidance says it generally reserves PLNs for cases involving fraud or serious neglect.

There are a few things worth knowing about how PLNs work:

• They can cover all outstanding NIC debts, including employer and employee contributions, Class 1A and 1B contributions, plus interest and penalties.
• “Neglect” is about whether you took the care a reasonable person would have taken to manage the issue.
• PLNs are issued by HMRC’s specialist Personal Liability Notices Team.
• You can challenge a PLN through an internal HMRC review or by appealing to the First-tier Tribunal.

What triggers a PLN?

The PLN Team looks at how a director ran the business. The factors that most commonly lead to a notice being issued are:

• Persistent failure to pay NICs while other payments were being made on time.
• Directors’ remuneration continuing to be paid during the period of non-payment.
• The director’s involvement with other companies where tax debts have gone unpaid.
• Assets of an insolvent business being transferred to a new company run by the same people.

Eames v HMRC – how this plays out in practice

The 2022 First-tier Tribunal case Eames v HMRC is a good example of what a PLN case looks like.

The sole director of a vehicle recovery company had been paying himself and connected companies, while knowingly failing to pay NICs owed to HMRC. When the company entered compulsory liquidation, HMRC issued a PLN for over £108,000 in respect of the outstanding NIC debt.

HMRC didn’t allege fraud – the question was simply whether the failure to pay amounted to neglect. The Tribunal found that it did, because the director had made a positive choice to pay himself ahead of HMRC, which a prudent and reasonable person in his position would not have done. The PLN was upheld in full.

What made things worse was the pattern. The director had previously run two other companies in the same trade, and both had gone into liquidation owing HMRC money. That history of repeated insolvency – sometimes called phoenixing – weighed heavily in the decision.

Unpaid PAYE

For Pay as You Earn (PAYE), the starting point is simple: if the company owes PAYE, that debt usually belongs to the company.

But there are exceptions. Regulation 72 and Regulation 81 of the PAYE Regulations give HMRC ways to move certain PAYE liabilities away from the company where the rules allow it. That does not mean every unpaid PAYE bill can be passed to the directors.

Generally speaking, the risk rises where PAYE hasn’t been dealt with properly and money has still been taken out of the company. If directors keep paying themselves while HMRC is left unpaid, HMRC may look at whether the directors can be pursued personally.

Security deposits

Where HMRC identifies a pattern of non-payment across one or more companies, it can require a business to provide a security deposit before being allowed to operate PAYE or VAT, and directors with a history of non-compliance may be named as personally responsible for ensuring the deposit is provided.

Phoenix company behaviour

Phoenixing is where a director closes a company that owes money – often to HMRC – and starts a new one carrying on the same or a similar trade, often with the same staff, premises, and customers. The purpose is to shed the old company’s debts while continuing the business through a clean entity.

When HMRC identifies a phoenixing pattern, the consequences can be significant. Directors involved may face PLNs for the old company’s unpaid NICs, and if the conditions are met, HMRC can issue a Joint and Several Liability Notice (JSLN) making them personally liable for the new company’s tax debts as well – not just what was owed by the old company, but possibly anything the new company incurs over the following five years. HMRC can also require security deposits before the new company is allowed to operate PAYE.

Separately, the Insolvency Service can investigate directors involved in phoenixing and bring disqualification proceedings against them under the Company Directors Disqualification Act 1986. If the court finds a director unfit, it can impose a disqualification order lasting between 2 and 15 years, preventing them from acting as a director of any company.

The Eames case is a clear example of how this kind of history factors into enforcement decisions – the director’s involvement with two prior companies that had gone into liquidation owing HMRC money was central to the Tribunal’s decision to uphold the PLN.

What if there are multiple directors?

Each director owes the same legal duties and can be held personally liable for their own conduct.

HMRC can issue notices against one, some, or all directors, and where liability is joint and several, it can pursue any single director for the full amount owed without splitting the debt.

It’s then up to the directors to sort out contributions between themselves. This also extends beyond formally appointed directors – shadow directors and anyone involved in managing the company can be pursued too.

Joint and Several Liability Notices

Introduced by Schedule 13 of the Finance Act 2020, Joint and Several Liability Notices (JSLNs) are a newer and increasingly used HMRC power. They’re aimed specifically at directors involved in repeated insolvency, tax avoidance, or tax evasion.

A JSLN makes a director personally liable – alongside the company – for the company’s tax debts. Unlike a PLN, a JSLN can cover all types of tax. For HMRC to issue a JSLN under the repeated insolvency rules, four conditions must all be met:

• In the last five years, the individual had a relevant connection to at least two companies that became insolvent with unpaid tax liabilities.
• A new company is or has been carrying on a similar trade to at least two of those old companies.
• The individual has a relevant connection to the new company.
• The old companies’ combined tax liabilities exceed £10,000 and represent more than 50% of their combined unsecured creditor liabilities.

If those conditions are met, the individual becomes jointly and severally liable for any unpaid tax the new company owes at the date of the notice, plus any tax it incurs over the following five years. If the old companies still have outstanding tax debts, the individual is liable for those, too.

The term “relevant connection” here is broadly defined. It covers directors, shadow directors, participators, and anyone directly or indirectly involved in managing the company. A JSLN can be challenged by requesting an HMRC review or appealing to the First-tier Tribunal within 30 days.

How directors’ remuneration can trigger personal liability

If you’re an owner-director of a small limited company, your remuneration probably involves a mix of salary and dividends.

However, if the company is under financial pressure, continuing to draw a salary or dividends while PAYE and NICs go unpaid to HMRC is one of the specific behaviours that can lead to a PLN or a PAYE transfer-of-liability direction.

Why your pay structure matters for liability

Most owner-directors take a modest salary and draw additional income as dividends. Salary is subject to Income Tax through PAYE and to both employer and employee National Insurance, while dividends are not subject to NICs.

This matters for liability because every time you run payroll – whether for yourself or your staff – your company is collecting PAYE and NICs on HMRC’s behalf.

If the company can’t afford to pay those over to HMRC, but you’re still drawing a salary or dividends, that’s exactly the kind of conduct HMRC may look at when considering a PLN or a PAYE transfer-of-liability direction.

Can HMRC recover debts from your personal income?

HMRC has several statutory routes to recover personal tax debts from a director’s income or assets, but each requires a specific legal mechanism:

• Coding out – for certain debts, HMRC can adjust your tax code, so the debt is gradually collected through your salary over the tax year.
• Direct earnings attachment – for certain debts, such as tax credit overpayments, HMRC can require deductions to be made from your earnings without a court order. If you pay yourself a salary through your own company, your company would be required to make those deductions from your pay.
• Court-based attachment – for other debts, HMRC can apply to court for an order requiring deductions from your earnings. Again, if you’re paying yourself through your own company’s payroll, the order would be directed at the company as your employer.
• PLN or PAYE transfer – in cases of director misconduct, HMRC can pursue you personally for unpaid NICs or certain PAYE debts as set out above.
• Direct Recovery of Debts – where you owe more than £1,000 and can afford to pay but choose not to, HMRC can recover funds directly from bank accounts. Safeguards apply, including prior contact, a face-to-face visit, a 30-day window to object (with a further right of appeal to the county court), and a requirement to leave at least £5,000 across your accounts.

The director’s loan account (DLA) and HMRC

If you run an owner-managed company, you will probably have a DLA. A DLA tracks everything moving between you and the company outside of salary, dividends, and reimbursed expenses.

When you’ve taken out more than you’ve put in, the account is overdrawn, which means you owe the company money.

Section 455 tax charge

If the overdrawn balance isn’t repaid within 9 months and one day of the company’s accounting year-end, the company must pay a tax charge under Section 455 of the Corporation Tax Act 2010.

For loans made before 6 April 2026, the charge is generally 33.75% of the outstanding balance. For loans made on or after 6 April 2026, the rate is 35.75%, reflecting the increase in the dividend upper rate.

This is a temporary charge – you can claim a refund from HMRC once the loan has been repaid – but it ties up a significant amount of company cash in the meantime. An overdrawn balance of £50,000 on a post-April 2026 loan would, for example, trigger a charge of £17,875.

Benefit-in-kind

If the overdrawn balance goes above £10,000 at any point during the tax year and you’re not paying interest at HMRC’s official rate (3.75% as of 2026/2027), a taxable benefit can arise, and NIC reporting and payment obligations may also apply.

There are also anti-avoidance rules that prevent “bed and breakfasting” – repaying a loan just before the deadline and re-borrowing shortly afterwards to dodge the Section 455 charge.

How to clear an overdrawn director’s loan

If your DLA is overdrawn, you have a few options:

• Repayment – paying cash back to the company directly.
• Declaring a bonus – the company pays you a bonus, subject to PAYE and NICs, which offsets the loan balance.
• Declaring a dividend – if the company has sufficient distributable reserves, a dividend can be declared and set against the loan. This will be subject to dividend tax.
• A combination – in practice, directors often use a mix of the above.

What happens in insolvency

If the company enters liquidation while your DLA is overdrawn, that balance doesn’t disappear with the company. It’s a debt you personally owe, and because an overdrawn DLA is an asset of the company, the liquidator has a duty to collect it for the benefit of creditors.

In practice, that means the liquidator will write to you demanding repayment, and if you don’t pay, they can take legal action to recover the amount owed.

How a liquidator can pursue you personally

If a company enters insolvent liquidation, the liquidator’s job is to recover as much as possible for creditors. That includes investigating the conduct of the directors, and where they find evidence of wrongdoing or unfair dealing, they can bring personal claims against you:

• Paying some creditors ahead of others – if the company is struggling financially and you choose to pay connected companies, friends, or family before paying HMRC or other creditors, a liquidator can treat this as unfair. They can reverse those payments and recover the money, which may then come back to you personally if you were the one who authorised them.
• Misfeasance – if a liquidator finds that you breached your duties as a director and caused a loss to the company, they can bring a claim against you under Section 212 of the Insolvency Act 1986. This could include taking money you weren’t entitled to, approving transactions that damaged the company, or failing to act in creditors’ interests when the company was insolvent.
• Transactions at undervalue – selling company assets for less than they’re worth, particularly to connected parties like family members or companies you control, can be challenged by a liquidator under Section 238 of the Insolvency Act. If the transaction took place within two years of insolvency, the liquidator can apply to court to have it reversed.

What can a director do to protect themselves?

The good news is that most personal liability cases involve behaviour that’s entirely avoidable – and the earlier you act, the more options you have. Here are the practical steps that make the biggest difference:

• Get advice early – talk to an accountant or licensed insolvency practitioner as soon as you think the company might struggle to pay what it owes. The Eames case shows that good intentions alone aren’t a defence if you didn’t act as a prudent person would.
• Talk to HMRC before they come to you – HMRC is far more willing to work with directors who come forward voluntarily. A Time to Pay arrangement can spread outstanding liabilities over a manageable period and shows you’re engaging in good faith.
• Keep records as you go – document board decisions, financial forecasts, and the thinking behind key business choices. If your conduct is ever questioned, records made at the time are your best evidence.
• Stay on top of your DLA – keep the balance manageable, repay within the Section 455 deadline, and don’t let it creep up during difficult trading periods.
• Prioritise PAYE and NICs – when cash is tight, these should be top of the list. They’re the liabilities most likely to lead to personal claims.
• Know your duties from the start – company directors have legal duties under the Companies Act 2006 from the moment they’re appointed. Getting familiar with them early is the best long-term protection you can give yourself.
• Consider directors’ and officers’ insurance – directors’ and officers’ insurance can cover the personal cost of defending claims brought against you in your capacity as a director, including HMRC enforcement actions and claims by liquidators for wrongful trading or misfeasance. It can also cover any damages or settlements you become liable to pay. Policies vary, so check the scope of cover with your broker.

Nicholas Campion, Director of Company Secretarial at 1st Formations, explains:

“Limited liability is one of the best reasons to incorporate. But it has limits which many directors don’t fully appreciate until it’s too late. The cases that go badly wrong usually share one thing in common: the director waited too long to get help. Act early, take advice, and don’t assume the company’s problems will stay the company’s.”

When can directors be held personally liable? – at a glance

The table below summarises the main situations in which a director of a limited company may face personal liability, who may pursue the claim, and the legal basis for each.

Starting your company on the right footing

Limited liability is strong protection, but it works best for directors who understand their obligations and take them seriously from day one.

The common thread in most personal liability cases is avoidable behaviour – paying yourself before HMRC, ignoring warning signs, or putting off getting advice until it’s too late.

If you’re setting up a limited company, getting the fundamentals right early makes everything easier down the line. 1st Formations can help you register your company quickly and correctly.