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Directors Loans

Director’s Loan Accounts

This is the first in a series of blogs looking at Directors Loan Accounts, to help Directors have a better understanding of how they work, the implications of an overdrawn directors loan as well as looking at repayment, interest and tax implications.

So to start with we will consider an Overview of a Director’s Loan Account (DLA)

A director’s loan account is not particularly complex, however it is important as a Company Director that you have a good understanding of how it works.

Unlike being a sole trader where taking money from the business is a straightforward process, withdrawing money from a company is a different matter altogether as a limited company is a separate legal entity.

Taking money from your company, as a Director, requires far more consideration and will be open to scrutiny.

Simply put, a director’s loan account is a record of company financials which documents any transactions between the company itself and the director, aside from salary and dividends.

When you don’t take money out of the company, apart from through dividends or payroll, your director’s loan account will have a zero balance or possibly be in credit if you have put your own money into the company or used personal funds for expenses or company assets.

The complexities arise once a director’s loan account becomes overdrawn.

Overdrawn Director’s Loan Account

An overdrawn DLA happens when a director has taken money out of the company that is not classed as a dividend or salary and the figure exceeds any money you have put into the company.

As soon as this happens, you will effectively be benefitting from a director’s loan; a loan from the company to yourself. All the time this is effectively ‘unpaid’, this loan would be considered a company asset.

Having an overdrawn director’s loan account isn’t the end of the world, as long as the directors and the accountant can easily keep track of the money owed to the company, and you can afford to repay it or offset it within nine months of your company year end.

But if you find yourself unable to repay your director’s loan on time, this is where the problems arise.

In this instance, HMRC will view this as an interest-free loan that you are benefitting from and will expect you to pay personal tax on what is classed as a ‘beneficial loan’. The benefit to you, in the eyes of HMRC, is the amount of interest you would have paid had you taken out a loan from a bank, which is known as the authorised rate.

Further problems arise when an overdrawn director’s loan is still outstanding nine months after the company’s end of year accounting period!
It is important to have an understanding of your DLA and to acknowledge that although it is not technically wrong for it to be overdrawn, it is not recommended.

However, something which is worth noting is that a director shouldn’t loan more than £10,000 from a company without approval from all shareholders.

 

In the next blogs, we will look at;

Tax Implications of an Overdrawn DLA  Read Here 

Possible Problems for a Director with an Overdrawn DLA in Insolvency

Interest on Overdrawn Director’s Loan Accounts    Read here 

Repayment of an Overdrawn Director’s Loan Account and What if you can’t Pay it Back?