What is a director’s loan account? A guide for limited company directors

• What is a director’s loan account?
• Director’s loan taxes
• Overdrawn director’s loan account
• Director’s loan account in credit

What is a director’s loan account?

HMRC defines director’s loans as withdrawals from your company that aren’t:

• salary, dividend, or expense repayments (it’s fine to pay yourself back for expenses you’ve personally paid for)
• money you’ve paid into (or loaned) the company before

You record all other withdrawals in your director’s loan account. The ‘account’ part of the term isn’t a physical account – it’s the record you need to keep of the money that you withdraw and pay into the company.

Each company director has to have their own loan account. When it comes to actually keeping the records, many accounting software packages have the ability to track director’s loans.

But as an overview, the account should show a director’s:

• cash withdrawals made from the company
• personal expenses paid with the company’s money or credit card

Your company accounts should also reflect all the money withdrawn and paid back.

Director’s loan taxes

Tax on directors loans is where it gets complicated. Your (and your company’s) tax obligations depend on whether you owe your company money (your account’s overdrawn) or whether your company owes you money (your account’s in credit) at the company’s corporation tax year-end.

This guide assumes that you’re both a company director and shareholder.

Overdrawn director’s loan account

Your personal and company tax responsibilities change the longer you take to repay the loan.

Within nine months of your company’s year-end accounting period

You don’t have any personal tax to pay if you pay the loan back within this time.

Your company will need to use form CT600A to show the amount owed at the end of the accounting period on the company tax return.

Your company won’t have a corporation tax liability, unless:

• 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) – in this case you pay corporation tax at 32.5 per cent of the original loan
• the loan was more than £15,000 (and you arranged another loan when you repaid it) – in this case you pay corporation tax at 32.5 per cent of the original loan

When you repay the loan, you can reclaim the corporation tax, but not interest.

More than nine months after your company’s year-end accounting period

There’s no personal tax to pay. But it’s in your company’s interest that you repay the loan within nine months of the company year-end because of the corporation tax liability after that:

• 32.5 per cent of the outstanding amount
• interest added until you repay the loan, or pay the corporation tax bill

You can reclaim the corporation tax, but not interest.

Write off director’s loan account (or leaving it unpaid)

You have to pay personal tax on the loan through your Self Assessment. This is at the dividend higher rate threshold of 32.5 per cent.

Your company deducts Class 1 National Insurance through payroll.

Responsibilities if you owe more than £10,000

If you owe more than this at any point in the year (interest-free), it counts as a benefit in kind for your company and you need to deduct Class 1 National Insurance (at 13.8 per cent on the full amount).

Your company needs to record it using form P11D – and as an individual, you need to record the benefit on your Self Assessment.

Gov.uk says you may have to pay tax on the loan at the official rate of interest.

If your company charges you interest

If this interest is below the official rate, then this is recorded as company income and treated as a benefit in kind.

You report the interest on a Self Assessment tax return. Gov.uk says you may have to pay tax on the difference between the official rate and the rate you paid.

Reclaiming corporation tax

Your company can reclaim corporation tax but only after a significant amount of time has passed, which is why it’s best to repay the loan within nine months of the end of the year-end accounting period.

Gov.uk says HMRC won’t repay corporation tax until "nine months and one day after the end of the corporation tax accounting period when the loan was repaid, written off or released".

This has the potential to significantly affect your company’s cash flow, so it’s best to carefully consider your options.

You need to reclaim corporation tax within four years.

Director’s loan account in credit

Your director’s loan account might be in credit if you’ve put funds into the company for expansion, for example, or you’ve paid for business expenses personally.

Your company doesn’t have a corporation tax liability, but you might have some responsibilities if you charge interest. That’s because interest counts as:

• a business expense for your company – your company pays you interest minus income tax at 20 per cent, and reports and pays income tax each quarter using form CT61
• personal income for you – you report this on your Self Assessment

You can draw on the balance in credit without any tax implications, but remember everything needs to be recorded.

Useful guides for small business owners

• How to set up a limited company
• Difference between a sole trader and a limited company
• How to do a self-employed tax return
• Do I need professional indemnity insurance

As with company taxes in general, the director’s loan account is a complex topic, involving different rules and responsibilities depending on your (and your company’s) situation. Please treat this article as a guide only and get professional advice if you’re not sure about anything.

Read more about the director’s loan account at gov.uk.