Understanding a Director’s Loan Account
If you are the director of a limited company, you should take time to fully understand what a director’s loan is, and the implications of an overdrawn director’s loan account.
First and foremost, a director’s loan is essentially money which a director withdraws from the company that cannot be classed as salary, dividends, or an expense, or the repayment of money which you have previously loaned to the company.
The loan account is used to record and document transactions between the company and the director and will be specifically disclosed within the company’s accounts and corresponding tax returns.
Tax implications of an overdrawn loan account
Having an overdrawn loan account is not necessarily a problem, as long as the balance of the loan is repaid within nine months of the end of the accounting period. Difficulties arise when a director’s loan is not repaid within nine months of the year end, or the business finds itself in financial difficulty.
Any loan of £10,000 or more must attract interest charged at the equivalent of HMRC’s official interest rate (or more). If not, the discount granted will automatically be treated as a ‘benefit in kind’ which has tax implications for both the company and the director.
You can find helpful information at https://www.gov.uk/directors-loans, extracts of which are provided below.
What happens if you repay the loan within 9 months of the year end?
| Your company’s responsibilities if you are a director and shareholder | Your personal responsibilities |
| Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.
If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. If you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest. If the loan was more than £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest. |
No responsibilities |
What happens if you do not repay the loan within 9 months of the year end?
| Your company’s responsibilities if you are a director and shareholder | Your personal responsibilities |
| Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.
Pay Corporation Tax at 32.5% of the outstanding amount, or 25% if the loan was made before 6 April 2016. Interest on this Corporation Tax will be added until the Corporation Tax is paid or the loan is repaid. You can reclaim the Corporation Tax – but not interest. |
No responsibilities |
What happens if the loan is ‘written off’ or ‘released’ (not repaid)?
| Your company’s responsibilities if you are a director and shareholder | Your personal responsibilities |
| Deduct Class 1 National Insurance through the company’s payroll. | Pay Income Tax on the loan through your Self-Assessment Tax Return. |
How is an overdrawn loan account dealt with if your company is insolvent?
An overdrawn loan account represents monies due to a company. It is noted as an asset of the company for the purpose of preparing a statement of assets and liabilities, in all types of insolvencies. At Keywood Group we are always clear that the Insolvency Practitioner, as Administrator or Liquidator is required to collect in money owing to the insolvency estate and must pursue repayment of the loan account.
We will work with directors who find themselves with an overdrawn loan account in order to reach a sensible outcome, but we are fully transparent from the outset of our discussions.
In some cases, a company may attempt to reduce (or extinguish) the director’s loan account by voting a sum equivalent to the overdrawn balance as a bonus or dividend. If the company is insolvent, or at risk of becoming insolvent, this is risky, and decisions made within relevant timescales prior to insolvency may be challenged.
How can we as Insolvency Practitioners in Birmingham and London help?
At Keywood Group we pride ourselves on providing you with clear advice from the outset and ensure that you make decisions relating to your company in full possession of the facts.
If your company is struggling, you should take action as quickly as possible. Please feel free to contact us for a no obligation chat about the options available or why not come to meet one of the team at our headquarters in Birmingham or even at our London office. However, if you are not based in Birmingham or London we can travel to you at no cost for a fully confidential consultation.
