Director loan accounts

Author: Russell Smith
July 20, 2012

It’s late at night and I’m feeling in a particularly technical mood.

Subject for tonight – director loan accounts!

A director of a company will usually pay him/herself a salary.  If the director also owns the business he/she is likely to pay a minimal salary and then dividends on top since this is the most tax efficient way of taking money from the company.

So if a director takes out excess money from the company and doesn’t call it a salary or a dividend or even a company expense repayment then it can only be one thing…

A director loan,

meaning 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.

Now 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.

But what if it wasn’t a dividend or expense and the director just fancied more money?

There’s two things to watch out for.  Firstly, 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 of the outstanding amount. 

Technically this isn’t a tax since once the director pays it back (either physically with cash or by declaring a dividend) the 25% tax is repaid to the director.

Secondly, the company should charge interest to the director on the loan at 4.5%.  This is hardly ever going to happen since it will usually be the director’s own company so if it doesn’t, 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 £5,000.

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