What is a director’s loan account?

A director loan is referred to an amount which a business owner, their spouse or family member get from the company that isn’t:

a reimbursement, salary or dividend payment

a reimbursement, salary or dividend payment The capital employed in the company or an amount paid into the company

A director’s loan account is referred to all the records of any amount / money paid into or borrowed from the company. It is a must to keep track of all such records. In case of an enquiry into a firm’s records and books of accounts, all the staff at HMRC is instructed to keep an eye on and inspect a director’s personal expenses. In most of the cases, a firm is expected to produce all the records of a director’s loan. As a business owner, to avoid any strict actions, it becomes essential to include any amount the company owes or vice versa in the balance sheet at the end of a company’s financial year.

Unlike a sole trader, a limited company is separate from an individual / owner and is known as a separate legal entity. Whatever gains the company makes goes into the business and not for personal use. Having said that, there are some ways by which these gains can be used by the owner and the director’s loan account keeps track of all such transactions. Wages and dividends are the two ways by which an owner can take money out of a limited company.

An owner can pay themselves any amount (provided the company can afford) as wages. However, as a normal practice, people generally tend to opt for a salary amount less than or equal to the National Insurance (NI) threshold level

At the end of a financial year, dividends are usually declared. However, a business owner can borrow money against the future dividends by way of director’s loan account. (Any company can only pay dividends from the profit earned after corporation tax)

A company’s annual accounts, also referred to as statutory accounts, are prepared at the end of the financial year from the company’s financial records. DNS Accountants is the leading owner-managed business accountants in the United Kingdom and help businesses with bookkeeping, year-end accounts, and tax planning.

Who is eligible to get a director’s loan?

There is a hint given in the name – you should be a director of the limited company.

Directors Loan Account - Debit Or Credit

As a director, there might be instances, such as financing a house deposit, certain purchases etc., when it becomes imperative to borrow money from one’s own limited company. In such circumstances, it becomes necessary to understand how an individual is related to his company, how will the director loan be treated, and how can an individual shield himself from paying huge tax bills.

Directors Loan Account in Debit

If a director’s loan is availed, the business owner or the company may have to pay tax. The tax responsibilities of the owner and the company depend on the way the loan amount is settled. Owners / businesses will also need to check if there are any additional tax obligations if:

The loan amount is in excess of £10,000 (£5,000 in 2013-14): If the loan amount is in excess of £10,000 during the year, the company is required to treat the loan as a Benefit in Kind and subtract class 1 National insurance (NI). The business owner must declare this amount on the personal Self assessment tax return and might have to pay tax at the authorized rate of interest

The loan amount is in excess of £10,000 (£5,000 in 2013-14): If the loan amount is in excess of £10,000 during the year, the company is required to treat the loan as a Benefit in Kind and subtract class 1 National insurance (NI). The business owner must declare this amount on the personal Self assessment tax return and might have to pay tax at the authorized rate of interest The actual interest amount is not paid to the company: The interest amount below the official rate must be recorded by the company and treat the discounted interest as a Benefit in Kind. The business owner might have to pay the tax difference between the official and the paid tax rate. This amount must also be reported on the Self assessment tax return

Directors Loan Account in Credit

The company is not liable to pay corporation tax on the amount invested into the business by the owner. The company can pay interest to the shareholder or business owner on the capital invested in the firm. This interest is subjected to income tax at a base rate of 20% and by using form CT61* a company must report and pay income tax each quarter. On the other hand, this amount is treated as a business expense for the company and as a personal income for the owner / shareholder. The business owner must report this income on the Self assessment tax return.

*Business can request form CT61 online or contact the HMRC.

Tax on Director’s Loans

The amount corresponding to a director’s loan maybe subjected to taxes. A company may also be required to pay tax for a shareholder or a director. The personal and company’s tax responsibilities depends on, if the director’s loan account is overdrawn or is in credit.

When I need to pay tax on a director’s loan?

You might need to pay tax when your DLA is overspent at the date of your company’s yearend. Once you pay back the total loan of the director by nine months and one day of the company’s year-end, you’ll not owe any tax. In other words, if your director loan account is overspent at your company yearend of 30th April 2019, the loan should be paid back before 01.02.2020.

Any outstanding payment of a director’s loan means your company will pay extra Corporation Tax at 32.5% on the remaining amount. This additional 32.5% is repayable to the company by HMRC when the loan is reimbursed to the company by the director. In case you do not recompense your director’s loan you might have to pay 32.5% personal tax of the loan amount. HMRC will not reimburse when the loan is repaid.

What are typical director’s loans tax rules?

Corporation Tax

The tax insinuations of a director’s loan depend on when you pay it back. You’re not required to pay any tax on it if you pay back the entire amount by nine months of the company’s year-end. An unpaid director’s loan will increase the Corporation Tax upto 32.5% on the remaining amount.

You must circumvent repaying a loan and then taking it out again soon after. This is an avoidance process that HMRC call “bed & breakfasting”. If they practice such activity they will treat the loan as never having been recompensed and tax the company consequently.

Personal Tax

Interest free loan of more than £10,000 will be categorized and considered as an advantage in kind and will be required to record on a P11D and Class 1A National Insurance is payable by the company at 13.8%.

Directors Loan Account New Rules

From 6 April 2016, the tax payable on outstanding loans was increased to 32.5% for loans, arrangements and advances made on or after 6 April 2016

From 6 April 2016, the tax payable on outstanding loans was increased to 32.5% for loans, arrangements and advances made on or after 6 April 2016 In the 2016 budget, the new measure was announced and introduced through the Finance Act 2016

Directors Loan Account Disclosure

According to the Companies Act 2006, section 413 provides for revelation of the particulars of any advances / loans / credits granted by a company to its directors. The details required include:

amount of loan / credit approved during a financial year

amount of loan / credit approved during a financial year information on the interest rate applicable

information on the interest rate applicable other important information and any amount written off or reimbursements, if any

other important information and any amount written off or reimbursements, if any the notes of the account should also state the full amount of loan and the full amount of interest applicable

the notes of the account should also state the full amount of loan and the full amount of interest applicable Under the FRS 8 related party disclosure, details for transaction with the directors is also required.

Overdrawn Directors Loan Account

Any payment made to a director, which does not form part of a director’s compensation must be set of against the director’s loan account. If a director has credit available, the payment can be set of against the director’s loan account with no tax implications. However, if there is no credit balance, the director is a debtor and is liable to pay the amount along with the applicable interest rate.

Your Directors Loan Account Managers – DNS ACCOUNTANTS

DNS Accountants is an expert group of taxation and accounting professionals that helps owner managed business to manage their accounts and tax obligations. The firm has a strong track record of supporting directors of companies with their loan account management. DNS Accountants is an eminent firm of Chartered Accountants operations across the United Kingdom. The firm’s learned team provides additional services such as payroll-management, CIS, business start-up advice, bookkeeping, self-assessment, business accounts, and taxation advisory. The firm is very fair in its dealing and delivers supreme customer service.

Other services

DNS Accountants in Harrow offers accounting and taxation services to freelancers / contractors and owner-managed businesses. The firm’s well-read team of CAs / ACA and taxation professionals helps clients with services ranging from business start-up advice to filing year-end tax returns.