What is a Directors Loan
A Directors Loan is the term used to refer to money which a Director of a business takes or lends. It does not include:
- Payroll Salary Payments;
- Legally Declared Dividends;
- Expenses claimed and paid.
Examples of Directors Loans
It is common for Directors to take money out or put money into a Company that they sit on the Board of. Here are some examples of common scenarios:
- Money invested (seed capital or money loaned to ease a tricky cash situation);
- Things a Director bought on behalf of the company (like a computer or stationary);
- Travel expenses that haven’t been repaid (but watch out for any personal tax implications here);
- The net amount (after tax) salary that should have been paid if a Director chose not to pay themselves due to tight cash;
- Dividends allocated at the end of a previous financial year but not yet drawn;
- Personal Tax payments;
- Personal expenses made on the Company credit card or from the bank account;
- Interest charged on a loan (but be careful of personal tax implications in doing this).
What is a Directors Loan Account
A directors loan account is a virtual account that exists in the Company books to record money put in and taken out by the Director.
It is important to log any money put into the business so that when a Director because once the balance sheet is filed at Companies House any loans are legally logged in the Company Books. This way it is clear:
- Exactly what the Director is owed by the business and agreed by signing off the balance sheet;
- The Director can be repaid for any loans without any tax implications;
- In the event a Director leaves the business, it is written down exactly what they are owed.
Example of a Directors Loan and Directors Loan Account
Say a Director puts £5,000 into the Company bank account to put towards start up costs then this will appear in their Directors Loan Account.
How to Set Up a Directors Loan Account
The Directors Loan Account is shown in the balance sheet either as one of these two things:
- A Debtor – if the Director owes the Company money
- A Creditor – if the Company owes the Director money
It is advisable to set up a nominal code for each Director in the balance sheet to help keep a clear record of each Directors Loan in the Company.
In the example above there would be a creditor of £5,000 which represents the loan made by the Director
Accounting Entries for a Directors Loan
The accounting entries are fairly straight forward if you imagine that the Directors Loan Account is like another bank account.
In the example above the entries would be:
- Dr Bank Account £5,000
- Cr Directors Loan Account £5,000
Say the Director then chose to buy a computer for £1,500 on behalf of the business then the accounting entries would be:
- Dr Computer £1,500
- Cr Directors Loan Account £1,500
The total balance owed to the Director would be £6,500 and this would appear in the balance sheet as a creditor.
Can Directors Charge Interest on Loans to a Company
Yes. If the Business chose to borrow money from a Bank it would need to pay interest. So similarly a Director is entitled to charge interest on loans to a Company.
There are some tax implications to be aware of before charging interest on Loans made.
How to Repay a Directors Loan
A Directors Loan can be repaid at any time or in line with any formal agreements made. In reality a Director may prefer to wait until the Company has sufficient funds to repay any loan.
There are no tax or dividend implications to repaying any loans a Director has made to a Company unless it causes a scenario where there is an Overdrawn Directors Loan Account.
What is an Overdrawn Directors Loan Account
An Overdrawn Loan Account is a scenario where Director draws out more than he/she is owed within a financial year. It is surprisingly common and can happen where:
- A Director takes too much salary;
- A dividend is paid but it is more than the Company can legally distribute;
- A Director takes money for expenses but fails to keep a record/receipts these and record them in the accounts.
The Director must repay or offset the overdrawn amount within 9 months of the end of year end to avoid any tax implications. If they are unable to fix an overdrawn loan account this will result in:
Corporation Tax Implications for the Company
The Company needs to disclose the overdrawn loan account on their Corporation Tax Return (CT600), paying a S455 charge. This is an additional tax charge of 25% of the overdrawn balance.
The good news is that the Company can claim this charge back again once the loan account is repaid.
If the loan was repaid within 9 months of the year end the Company won’t have to pay the S455 charge, but will still need to disclose it on the Tax Return.
Benefit in Kind P11d Tax for the Director
If the overdrawn Directors Loan Account exceed £10,000 during the tax year then the loan is considered a Benefit in Kind.
This attracts P11d Tax Charge on the Director at their highest rate of tax and may have some knock on effect for payroll tax coding.