What Is a Director’s Loan Account?
If you’ve recently started a Limited Company or have been going for some time, you’ve probably heard the phrase ‘Director’s Loan Account’, but what exactly is a Director’s Loan Account.
Think of a Director’s Loan Account as a running tab between you and your company. It tracks money flowing in both directions. It’s like having a bank or loan account with your company, but with some serious tax implications if not managed correctly.
Money you’ve borrowed FROM the company
Common myth and mistake when running a small company: “It’s my company, it’s my money, why can’t I take it out”
Yes, it’s your company, but your company is a separate legal entity to you as an individual. When it comes to spending money from the company, if it’s not reasonable and wholly and exclusively for the purpose of the business, then it may be deemed personal expenditure and should be allocated to the director’s loan account and show that you owe the company money.
You may also owe the company money due to genuine loans or monies drawn more than salary and dividends.
Money you’ve put INTO the company
The company will owe to you when you put money in and that doesn’t always mean you’ve physically transferred money into the company bank. Here are some examples of when this can happen:
- You’ve put personal money into the company, such as start-up capital
- You’ve paid for company expenses out of your own pocket
- You’ve not taken your full salary or dividend
What does this all mean?
At the end of a period, you will likely be in a position where either the company owes you the money or you owe the company money. The latter is the dreaded ‘overdrawn loan account’ which you may have heard your accountant mention before.
The Tax Sting
The Tax on Director’s Loan Accounts Owed to You
If the company owes you money, then you can draw this down tax free as it’s a repayment of a loan.
You can also charge interest on your loans into the company. There may be additional personal tax to pay on this but if there is a commercial reason to do this, the interest paid may also receive tax relief in the company.
One thing to watch out for, if the company becomes insolvent and you have made ‘preferential repayments’ of your loan over other creditors, such as your suppliers or HMRC, you could be ordered to repay this
The Tax on Director’s Loan Accounts That You Owe the Company
At your company’s year-end and remains unpaid 9 months after that year-end, you’ll face Section 455 tax at 33.75% on the overdrawn amount. S455 tax is an additional tax on loans to directors and shareholders.
Example: If you have an overdrawn balance of £10,000 at year-end and don’t repay it within 9 months, your company will need to pay £3,375 in Section 455 tax. This is paid alongside and at the same time of your corporation tax.
Good news: This tax is temporary and refundable once you’ve repaid the loan.
Where an overdrawn loan account exceeds £10,000, this is treated as a taxable benefit. Either interest at HMRC’s Official Rate of interest should be charged on the loan or the interest that should have been charged will need to be reported as a benefit in kind, which national insurance is payable on.
8 Smart Ways to Manage Your Director’s Loan Account:
1. Keep accurate records of all transactions through Software, like Xero
2. Plan dividend payments carefully
3. Repay any overdrawn amounts before the 9-month deadline
4. Consider declaring dividends to clear the loan (if you have sufficient profits)
5. If there’s not sufficient profits, a bonus via payroll could also clear the account if overdrawn
6. Have a clear separation of personal and business expenses
7. Plan ahead for large withdrawals
8. Ensure the company has sufficient assets to pay its liabilities
The Bottom Line: A Director’s Loan Account is a useful tool for managing money flow between you and your company, but it needs careful handling. Get it wrong, and you could face significant tax charges. Get it right, and it can be a flexible way to manage your personal and business finances.
The Brisan Way to Manage Your Director’s Loan Account
Need Help? If you’re unsure about your Director’s Loan Account or need help planning your withdrawals, book a free 15-minute expert advice session with our team.
We’ll help you stay compliant with our essentials package, tax efficient and provide you with the clarity you need to run your business.
