The first time most business owners hear the term Directors Loan Account, is when they sit down with their accountant to discuss their Limited Company year-end accounts.
I know from taking client meetings myself, that us accountants don’t always explain what this account is or what it is made up of.
So, just in case you felt a little bit too embarrassed to ask, I thought I would answer some questions you may have.
What is a Directors Loan Account?
Your director’s loan account is a log of how much money either your limited company owes you or that you owe your limited company.
It’s a record of much money is left for you to withdraw tax free from your company, or whether you will need to pay the money back if you’ve withdrawn too much.
How does a Directors Loan Account work?
We are all familiar with bank accounts or petty cash accounts; we pay money in, we take money out and then there is the balance at the end of the day, the month, or the year.
Your Directors Loan Account works in exactly way as your bank account. Money goes into it and then money comes out, and then there is a balance at the end. The only difference being that it is not a real account.
It’s for this reason that your Directors Loan Account isn’t always something that you are aware of as the year goes on. Unless you do your bookkeeping on a regular basis, it’s not something that’s easy to be checked.
The result is that you are generally only aware of your director’s loan account when your bookkeeper has done the bookkeeping, or your accountant has done your year-end accounts.
What money goes into your director’s loan account?
When you first set up your limited company, the money that goes into your Directors Loan Account is going to be any initial capital you’ve paid in.
This could be:
- A personal loan that you have taken out, or personal savings that you have introduced to give the Limited Company some money to start off with.
- Equipment which the limited company has purchased from yourself.
However, as your Limited company begins to trade, the money that goes in will be anything that you have paid for on behalf of the company. Or any money that the Limited Company owes you. These can be things such as:
- Your Director’s salary if you run a payroll but don’t take the money.
What money goes out of your director’s loan account?
As well as paying money into your Limited Company, it is likely that you will also take money out of your director’s loan account during the year.
This is generally going to consist of:
- Personal expenses, such as fuel, your car insurance and services along with food and drink.
- Small cash withdraws that you may take as and when.
- Regular direct debits that are not salary or confirmed dividend amounts.
- Heath or Life insurance payments.
- Donations made in your own name.
What happens if the Limited Company owes me money?
Any money that the Limited Company owes you is treated as a loan.
This is your money which you can withdraw whenever you want. There will be no tax to pay on any withdrawal you make because it is treated as the Limited Company repaying its loan from you, rather than you taking additional income.
What happens I owe the Limited Company money?
In summary, it is not good to owe your limited company money.
Having the ability to borrow money from your Limited Company is deemed to be a bit of a perk and it should come as no surprise that HMRC do not like this.
The first thing you need to do is to try and pay it back. As most directors are also shareholders, the first stage is to look at taking more dividends. You will need to have the profit in the limited company to be able to do that, and these dividends will be taxed as additional income to yourself.
If the amount that you owe your Limited Company exceeds £10k and you are unable able to pay back the amount within nine months of the financial year end, it will be subject to a corporation tax charge called S455 tax. HMRC will repay this charge to you once you can prove that the loan has been repaid.
Do you have an example, Claire?
I do actually.
A while ago I recorded a video where I ran through a directors loan account using a Dental practice as an example.
I don’t have the most thrilling of voices but hopefully the video will help you to visualise a Directors Loan Account.