If you are a limited company owner or director, you may have heard about a directors loan account. Here we shed some light on exactly what it is and how it works in your business’ accounting.
What is a ‘Directors Loan Account’?
Simply put, this is where any money you draw from your company goes, until it is declared as taxable income. This is usually in the form of Salary and/or Dividends.
If you draw money from the company without the relevant paperwork, the money builds up in a Directors Loan Account.
If you imagine your loan account as a two-column list, when you take money out the left column builds up.
When you declare your salary or a dividend, the right-hand side of the list begins to build up. The aim is that one cancels the other out, or preferably the right-hand side is bigger than the left. This means the company owes you money which is what we want to see (and not the other way around).
Example:
| ‘Debits’ | ‘Credits’ | Balance |
| 12/12/18: Bank £500 | -£500 | |
| 15/01/19: Bank £2500 | -£3000 | |
| 31/01/2019 Salary £700 | -£2300 | |
| 05/02/19: Bank £500 | -£2800 | |
| 15/02/2019 Dividend £2800 | 0 | |
In the example, you can see your directors loan from the company building up and then being cleared by salary and dividend.
What are the tax saving opportunities?
Good use and forward planning of a Directors Loan Account can save tax.
We will cover efficient dividend timing in another blog post, but on a basic level, it is possible with the right paperwork and profits to ‘declare’ a dividend (add to the right column – to the money the company owes you) without paying out physical cash.
Any personal tax is then paid on it in the tax year it is declared. The money is declared and noted as a debt to you – the director – in the loan account, so it can be taken at a later date without further tax. This is useful for making the most of your various tax allowances. The £2000 a year dividend allowance is a prime example, where you can receive £2000 tax-free each tax year.
You can also borrow up to £10,000 from your company, via your loan account. This is possible without paying interest or as a personal taxable benefit on this interest-free loan. This can be a good way to cost-effectively loan yourself some money, even if just for a short period.
Tax Traps
There are fairly complicated rules around the Director’s Loan Account when you borrow money from the company.
As such, if you are looking to take a loan it is worth speaking to a professional to ensure you have everything correct.
It should be noted that exceeding £10,000 in your loan account at any point can cause you an unexpected tax bill. So regular salary and dividends taken should be noted to keep this under that level. So, if you only see your accountant once a year, make sure you ask how this is achieved.
We have been in many HM Revenue & Customs enquiries where the client has had to provide a detailed print of the loan account, showing the balance each day for exactly this point.
If you have any questions or concerns around your loan account, feel free to contact our office on 02392 240040 and speak to one of our accountants.