Director’s Loan Accounts: Are You Using Yours to Your Advantage?

What Is a Director’s Loan Account?

If you’re a limited company director, there’s one number in your accounts that’s well worth understanding:

Your director’s loan account balance.

Put simply, your director’s loan account records money moving between you and your company that isn’t salary, a dividend or the repayment of an expense.

Depending on what has happened over the years, you might owe your company money or your company might owe you.

And knowing which way that balance goes could affect how you take money from your business.

When Your Company Owes You Money

Director’s loan accounts are often discussed when a director has borrowed money from their company.

But they can work the other way too.

Perhaps you put £10,000 of your own money into the company when you started it and later paid £2,000 of company costs personally.

Assuming everything has been correctly recorded and nothing has already been repaid, your company could owe you £12,000.

That matters because the company may be able to repay money it genuinely owes you without that repayment itself being treated as additional salary or a dividend.

Before automatically taking more salary or dividends, therefore, it’s worth knowing whether some of the money you want to take out of your company is already yours.

What Could Be Sitting in Your Director’s Loan Account?

It’s worth checking that everything has been properly recorded.

Your director’s loan account could include:

• Money you’ve personally lent or introduced to the company.

• Genuine company expenses you’ve paid from your own pocket.

• Business mileage in your own car that you’ve properly claimed.

• Assets you’ve personally transferred to the company, where correctly accounted for.

• Money the company has already repaid to you.

• Personal withdrawals from the company that haven’t been treated as salary, dividends or expense repayments.

This is why simply knowing the balance isn’t enough.

You also need to understand what makes it up.

The simple TaxTalks 3-Step Director’s Loan Check

1. Find the balance

Ask your accountant for the current balance on your director’s loan account and whether the company owes you or you owe the company.

Don’t wait until your annual accounts are prepared to discover the answer.

2. Check nothing is missing

Think back over the year.

Have you paid company expenses personally?

Have you claimed all your legitimate business mileage?

Have you put personal money into the company?

Have you transferred an asset into the business?

And have all repayments you’ve already received been recorded?

Small amounts can add up, particularly if this has been happening over several years.

3. Work out who owes who

If the company owes you, find out whether repaying some or all of that money makes sense.

If you’ve genuinely lent money to your company, it may also be possible to charge the company interest. This can provide another source of personal income, although there are tax and reporting requirements, so it should be discussed with your accountant before doing it.

If you owe the company, don’t leave the balance unattended.

There are specific tax rules surrounding overdrawn director’s loan accounts, and the consequences can become more significant as the balance increases or remains outstanding.

The £10,000 Director’s Loan Rule

One number directors should be particularly aware of is £10,000.

If relevant beneficial loans from your company exceed £10,000, benefit-in-kind rules can apply.

There are also separate Corporation Tax consequences for certain loans to shareholder-directors that remain outstanding after the relevant deadline.

This is one of those areas where dealing with the balance early is much easier than discovering a problem when your accountant prepares the year-end accounts.

If your company has lent you money, make sure you understand:

• How much you owe.

• When the loan arose.

• Whether it has exceeded £10,000.

• Whether interest is being charged.

• When it needs to be repaid.

• What the tax consequences could be.

Can You Charge Your Company Interest on a Director’s Loan?

If you lend money to your company, you can potentially charge the company interest.

The interest can be a business expense for the company, subject to the usual rules, while giving you an additional source of personal income.

However, the interest you receive is taxable income and the company has specific tax deduction and reporting responsibilities.

So this isn’t something to set up informally.

Ask your accountant whether charging interest is appropriate for your circumstances and what needs to be put in place.

Don’t Treat the Company Bank Account as Your Own

One of the most important things to remember about running a limited company is that the company’s money isn’t automatically your money.

The company is a separate legal entity.

When money moves between you and the company, you should understand what it represents:

• Salary?

• Dividend?

• Expense reimbursement?

• Director’s loan?

• Repayment of money the company already owes you?

Getting into the habit of identifying transactions correctly makes your bookkeeping cleaner, helps prevent unexpected tax issues and gives you a much clearer picture of your financial position.

Ask Your Accountant One Question

At your next meeting with your accountant, ask:

“Is there anything missing from my director’s loan account, and am I using it in the best way?”

Your director’s loan account could be helping you take money from your company efficiently, providing another source of income or quietly building into a tax problem.

One number. Five minutes to check. Well worth knowing.

Need Help With Your Limited Company Accounts?

At Blackdown Accounting, we help limited company directors keep their accounts and tax affairs straightforward, accurate and up to date.

If you’re unsure what’s sitting in your director’s loan account, whether your company owes you money or what the tax implications of an overdrawn balance could be, we can help you understand the position as part of your accounting and tax support.

Blackdown Accounting

Helping business owners save tax, understand their numbers and make better decisions.