Director’s Loan Account: What You Need to Know
A director’s loan account records money moving between a director and their limited company that is not salary, a dividend, an expense reimbursement or repayment of an earlier balance.
If a director introduces money or personally pays company costs, the company may owe the director. If the director withdraws too much, the account becomes overdrawn and the director owes the company.
When the Company Owes the Director
The company can normally repay money it owes the director without additional Income Tax. The bookkeeping should show what created the balance and distinguish genuine company expenses from personal costs.
Interest paid by the company to the director has separate tax and reporting requirements, so advice should be taken before interest is added.
When the Director Owes the Company
An overdrawn account can create company and personal tax consequences. If a loan to a participator remains outstanding nine months and one day after the end of the company’s accounting period, the company may have to pay Section 455 tax.
This tax may eventually be reclaimed after the loan is repaid, released or written off, but repayment is not immediate. The company must make the claim at the correct time.
Loans exceeding £10,000 at any point can also create a taxable beneficial-loan benefit unless sufficient interest is paid under the relevant rules. Reporting and Class 1A National Insurance may then be required.
Writing off a loan does not make the tax problem disappear. It can create personal tax and National Insurance consequences, depending on the circumstances.
The balance shown in the accounts should agree with the underlying transactions. Incorrectly recording dividends, expenses or personal purchases can create a loan that does not reflect what happened. Reviewing the account before the year end provides more time to correct classifications and consider repayment options.
Repaying and Borrowing Again
HMRC has rules designed to prevent a director repaying a loan shortly before the deadline and withdrawing a similar amount soon afterwards. These “bed and breakfasting” rules mean transactions must be reviewed carefully rather than looking only at the year-end balance.
Keep the Account Up to Date
Regular bookkeeping helps identify problems early. Before taking money, confirm whether it is a valid dividend, salary, expense or loan.
GMS Accountants helps directors in Cambridge and Nottingham review loan accounts and plan repayments. Read our guide to paying yourself from a limited company or contact us for advice.
