What is a director loan account?
Author: Russell SmithJuly 13, 2015
A Director loan account is the rolling balance of whether the director is owed any money FROM the company or whether they owe any money TO the company.
A common example is where the director has incurred company expenses on a personal debit card and needs to claim back this money from the company. In this case the company owes the director.
This is going to happen quite a bit, especially in the early days, but you really want to try your hardest to keep all company expenses in the company bank account. It just saves time and hassle.
However, if a director takes too much out of the company and so it cannot be called dividends (since you can’t take out more dividends than there is profit) it therefore must be a director loan i.e. the company has lent money to the director. You may think that this would be a useful way of taking more than the £28,606 dividends tax-free and you would be right to a point.
The trouble is, if you have an overdrawn director loan account at the year end (i.e. the director owes the company) you have 9 months to pay it back. You can either physically pay it back in cash or you declare a dividend on paper but don’t actually pay yourself.
If you do not pay back the loan within 9 months, you will be a hit with a 25% tax charge. Which is coincidentally, the same % as the income tax charge on dividends of £28,606. There is one difference this is a tax charge on the loan. If you pay the loan back you will get the tax back.
Generally though, you want to avoid this at all costs.