20 Jun
What is a Director’s Loan Account?

holding bank card for accountWe’ve written about Director’s Loans before, as we understand how daunting the act of borrowing money from your own company can be. Luckily for you, we’re here to help answer your burning questions and guide you through. You’re welcome!

So, what exactly is a Director’s Loan Account?

In a nutshell, it's loans for directors that are recorded neatly in an account.

Okay, let's be honest - you know it was never going to be quite that easy! As with everything involved in staying on the right side of the good folks at HMRC, there’s a little bit more to it than that. Quite a bit in fact.

While you may own a limited company, the money in your company bank account doesn’t technically belong to you. Hurts, doesn’t it. We know *sad face*.  

When you created your shiny new limited company, you brought an entirely new and entirely separate legal entity into the world – one in which every penny taken out must be recorded. And that is exactly what a Director’s Loan Account is. It is a detailed record of all the debt and credit, all the transactions, between you and your company.

Come year end you’ll either owe the company money, or the company will owe you. Needless-to-say, there’s a whole bunch of tax rules and regulations to consider along the way. You weren’t expecting it to be straightforward, were you?

What do I need to record in my Director’s Loan Account?

HMRC defines a Director’s Loan as money that is not:

  • a salary, dividend or expense repayment
  • money you’ve previously paid into or loaned your company

If you take money out of your company for pretty much any other reason, then you’ll need to record it neatly in your Director’s Loan Account. This means that Director's Loan Accounts tend to be jam packed with two kinds of transaction – cash taken out by a director, or personal expenses paid using your company’s money or card.

This is where it becomes tricky.

Business expenses are those that are occurred as a crucial and necessary part of completing your duty of employment. They’re strictly business! Anything else is just personal.

What you need to record in your Director’s Loan Account is all those myriad and complex transactions that take place between your personal finances, and those of your company. HMRC will be keeping a close eye through your company’s annual tax return, so a well-run Director’s Loan Account is one sure fire way of keeping them happy.

What are the benefits of a Director’s Loan Account?

Whether it’s covering an unexpected repair bill, bolstering a temporary shortfall, or paying for that well-deserved holiday, there are many reasons why you might take a loan from your company.

It might be an emergency - or it might be sheer convenience - but the important thing to remember is that while a Director’s Loan can help make your money work better for you in the short-term, it will not have been subject to either personal or company tax.

HMRC will come calling to collect what is due (cue scary music)...

How do I work out my tax and what to pay back?

This is worth noting.  For the entire time you borrow money from your company, you’ll be classed as ‘overdrawn’. If you’re overdrawn and don’t pay back the loan within nine months and one day of your company’s year-end, then you’ll be charged interest – at around 32.5% of the amount outstanding. Yikes!

But, if you pay back the entire Director’s Loan within nine months and one day of the company’s year-end, you won’t owe any tax.

Limits also apply, so if you owe your company over £10,000 then the loan will be viewed as a benefit in kind, and it’ll become subject to both personal and company tax.

We did warn you - this was never going to be straight-forward!

Do HMRC monitor Director’s Loans Accounts?

They most certainly, undoubtedly, unequivocally, unavoidably do.

Director’s Loan Accounts are not something to overuse, and strict regulations have been put in place to make sure they are not being abused. Regularly overdrawn accounts are watched closely, and it may be decided that the money is not a loan but a salary – meaning you could be charged Income Tax and National Insurance.

Our advice is to monitor your Director’s Loans closely, to limit them to the £10,000 threshold and, most importantly, to quickly find an accountant you can trust to help navigate you through.

That is where we come in! Just give us a shout to find out what we can do to help you keep on top of your accounts.

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