Director loan account, what is it?

Director loan account, what is it?

If you are running your business through a limited company, it is important that you understand the concept of director’s loan account.

A company director would normally pay him/herself a salary. If the director also owns the business, he/she is likely to pay a minimal salary plus dividends from the company in the most tax efficient way.

Tax, Accounts, Loans, HMRC

If a director takes out excess money from the company beyond his/her salary, dividend or even a company expense repayment, it would be classed as overdrawn loan account.

A director loan means that the company has lent money to the director. This is shown on the balance sheet as a debtor i.e. the director owes the money back to the company.

In many cases it could be that the director is entitled to the money but maybe hasn’t submitted an expense form or hasn’t declared a dividend. Once that happens, the directors loan account clears back to zero.

Why does it matter?

After having being paid a salary, dividends and expenses claims the director decides to take more out of the company, what happens then?

1. If the director has an overdrawn director loan account at the end of the company year end and this director loan remains overdrawn (i.e. the director still owes the company money) 9 months after the year end, then HM Revenue & Customs will charge the director 25% tax on the outstanding amount.
This isn’t a tax, assuming the director pays it back (either physically with cash or by declaring a dividend) the 25% tax is repaid to the director.

2. The company should charge interest to the director on the loan at 4%. This is hardly ever going to happen since it will usually be the director’s own company which means the director has received a loan for no interest meaning it is a benefit in kind item which goes on the director’s P11D. This only applies to loans above £10,000.

For more information or advise feel free to contact our Director Tim Hammond on 07920 141 762

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