A director’s loan account is something that all company directors’ will have access to but it is important to remember that the money in your limited company bank account doesn’t actually belong to you.
The HMRC defines a director’s loan as money taken from your company that isn’t either a salary, dividend or expense repayment or any money that you’ve previously paid into or loaned the company. Below are seven things you need to know about a director’s loan account.
1. What are director’s loans used for?
Director’s loans are used when you need to access the money in your limited company, other than what you take out as salary, dividend, or business expense repayments. They can be used for when your personal finances need a boost, perhaps due to any unforeseen financial circumstances. Director’s loans can also be used to bridge the gap temporarily until company profits allow dividends to be paid out.
2. Who can take a director’s loan?
The clue is in the name – you must be a director of the limited company, it’s that simple.
3. What should a director’s loan account contain?
HMRC keeps a close eye to director’s loan accounts through annual company returns, so you need to ensure your records are complete and accurate.
It is important that within your director’s loan account you should record:
• Cash withdrawals and repayments, you make as a director
• Personal expenses paid with company money or a company credit card
• Interest charged on the loan
4. Can director’s loans be used to start a business?
Director’s loan accounts work both ways. The company’s expenditure can be funded by loans from its directors which can then be repaid when the company’s funds allow.
5. Can director’s loans be written off?
When companies face financial problems, a high number will feature an overdrawn director’s loan. While the company itself can “write off” the loan, it is not uncommon for a liquidator to reverse this and ask the company director to repay the loan to pay the company’s creditors. These implications should be discussed with a professional accountant.
6. What’s the interest on director’s loans?
If you borrow or lend money to your company via a director’s loan account, the interest rates charged or received will affect the tax due. This is a complex area and you should take advice from your accountant or seek advice from HMRC.
7. What are the rules for an overdrawn director’s loan account?
An overdrawn director’s loan account is where you, as a director, have taken money from the company that is not salary or dividend and the amount exceeds what you have put into the company.
As we have described above, you have nine months from your company’s year-end to repay a director’s loan. The key thing to remember is that while it remains unpaid, it is considered a company asset. This means, if the company is insolvent, a liquidator is likely to pursue the balance of the loan.
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