What is a director’s loan account?

If you have a Limited Company, you will probably have heard us referring to your directors’ loan account. But what is a director’s loan account?

A director’s loan is defined as funds a director deposits or withdraws from the company that isn’t salary, dividends, or expenses repaid.

A record of the deposits and withdrawals are dealt with through the loan account and will result in either an overdrawn loan or a loan that is in credit.

If the loan account is in credit, then it means that the director has paid in more than they have taken out – the company owes money to the directors.

If the loan account is overdrawn, then the director has taken out more money than they have paid in – the directors owe the company money.

Loan account in credit at year-end:

Where a loan account is in credit, the balance is available for the directors to withdraw from the company without any further tax implications.

The company may also pay interest on the loan to the director. This is an allowable tax deduction in the company but is taxed as personal income of the director.

The company will pay the interest to the director net of 20% tax. The tax will be reported and paid over to HMRC using a form CT61.

Loan account is overdrawn at year-end:

Where the loan account is overdrawn at the year-end, and this cannot be taken as a dividend, there may be extra tax implications:

• If you repay the loan within 9 months of the year-end – there will be no further tax to pay. It should be noted that there are certain rules in place to prevent a director from repaying the loan and then taking it back out again within 30 days.
• If you do not repay the loan within 9 months of the year-end – S455 tax is payable at 32.5% of the outstanding balance. This is paid as part of the annual corporation tax bill. The S455 tax can be reclaimed once the loan has been repaid.

Where a loan is more than £10,000, and the director paid the company interest below the official rate, then this will be treated as an interest-free loan and will also be taxed as a benefit in kind.

How can we help?

 If you are unsure how much you can take from your company without resulting in an overdrawn loan account or would like further information on any of the points mentioned above, then please get in touch.