A Directors’ Loan Account is a record of any money a company director takes out of the Company other than salary, expenses or dividends. If the money taken out of the Company exceeds the amount that was put into the account by the director, the account becomes overdrawn. The money paid in might have been a loan to the Company. Money paid by the director for shares in the Company does not count as credit to the Directors’ Loan Account.
These loans taken out from the company accounts need to be paid back within 9 months of the end of the accounting period. If the money is not paid back, there may be tax implications. The Limited Company will have to pay additional Corporation Tax.
The outstanding amount has to be declared in the Company’s tax return. At the end of the financial year, any money the director owes the Company, or the Company owes the director becomes part of the balance sheet.
If the director owes the Company more than £10,000, the company must treat the loan as a ‘benefit in kind’. The director must report the loan in their personal self assessment tax return. They may have to pay tax on the loan at the official rate of interest. The Company must pay National Insurance contributions accordingly.
In Case of Insolvency
Problems arise when the Directors’ Loan Account is overdrawn in case of insolvency. If the Director is unable to repay the loan at this stage, the liquidator will try to recover the outstanding loan amount from the Director’s personal assets. This includes their home and any other assets they may own.
If the debt is being written off, the loan account balance becomes an income for the director and needs to be taxed accordingly. Depending on the director’s earnings, this tax charge can be as much as 40% of the loan amount. The director will have to find this additional tax liability or risk being pursued by HMRC.
How Alba Financial Accountants can help
Here at Alba we can help with any financial aspect of running a Limited Company as a director. Whether you are starting a Limited Company, need guidance with the accounts or help and advice around directorship, simply email us at admin@alba.uk.com or call us on 01509 853779.