Director’s Loan Accounts – Your Questions Answered

Many clients have queries about Director’s Loans which is why we have covered some of the most common queries on our new online Business Owners FAQ Hub.

To give you a flavour of the benefits of using this helpful online resource, here are three of the most common queries we receive about Director’s Loans:

What is a director’s loan account?

A director’s loan account is a method for keeping track of the transactions between you and your company.

This acts as a record of money taken out of a limited company, which isn’t:

  • Salary;
  • Dividend; or
  • Business expense repayment.

It also accounts for any money lent to the company by you or another shareholder, which could cover the purchase of new equipment, a cash flow injection or other investments.

How do you prepare a director’s loan account?

HM Revenue and Customs (HMRC) must be provided with a director’s loan accounts through annual company returns.

In your director’s loan account, you should record:

  • Cash withdrawals and repayments you make as a director
  • Personal expenses paid with company money or a company credit card
  • Interest charged on any loans.

What does an overdrawn directors’ loan account mean?

If you take more money out of the company than you put back in, the loan account can become overdrawn.

Any overdrawn amounts are considered to be assets of the company on your balance sheet until they are repaid.

If you’re a shareholder and director and you haven’t been charged interest on money you owe to your company of more than £10,000 your company must:

  • Treat the loan as a ‘benefit in kind’
  • Deduct Class 1 National Insurance

This must also be recorded on your tax return and may result in tax on the loan at the official rate of interest.

Therefore, money should be paid back within nine months of the end of the accounting period to prevent a significant tax bill from arising.

There are other Corporation Tax implications of an outstanding overdrawn loan account nine months after the balance sheet date.

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