If you run a limited company, you may have come across the term ‘Director’s Loan Account’ but may not know what it means. In this post, we’ll look at what one is, why they are important and how to minimise your tax liabilities.
What is a director’s loan account?
A director’s loan account isn’t an account as such but a virtual account that keeps track of money the company owes directors of the company or that the directors owe the company.
Why would the company owe a director money?
Sometimes, as a director of your company you may need to pay for company expenses from your own personal account. This is often the case in the early stages of a limited company when the company’s own cashflow might be quite tight. For example, if your company has a payroll scheme but doesn’t have the funds to pay your director’s salary, then this would be recorded in the director’s loan account.
The account can also be used for claiming back items such as the use of your home as an office. You would add it to the director’s loan account and then would be reimbursed as and when your company has enough funds.
What is a director’s loan?
Technically, your company’s money doesn’t belong to you, but you can have access to it through a director’s loan. The HMRC defines this as money taken from your company that isn’t:
- A salary, dividend or expense repayment
- Money you’ve previously paid into or loaned the company.
So, if you take money out for any other reason, such as covering an unexpected bill, you must record this in your personal director’s loan account.
What is an overdrawn director’s loan account?
If you, as a director, owe the company money this is known as an overdrawn director’s loan account. This often happens when a director takes money out as dividends, but there aren’t enough profits in the company to cover them. This can have very serious Corporation Tax implications. If the money isn’t repaid within 9 months of the end of your financial year, the company will be charged an additional 25% in S455 Corporation Tax on the balance of the outstanding loan. The purpose of this additional tax is to discourage misuse of company funds.
S455 is recoverable, but only once the director’s loan has been repaid and it can be a lengthy process to get the money back from HMRC. And be warned HMRC are known to closely monitor director’s loan accounts that are regularly overdrawn. We would strongly recommend that you always remember that the company’s money is not your money!
If you do owe your company over £10,000 at any given time, it will create tax implications for you personally, as it will be treated as a beneficial loan. This will need to be declared on form P11d and in your personal tax return.
A director’s loan account is something that can be easily mismanaged, resulting in hefty fines from HMRC, so if you are at all unsure what to do, we recommend you get proper advice.
We are more than happy to help, so just give us a call and we will help you stay on the right side of HMRC.