A director’s loan is the name for money you take from your company that:
- Isn’t a salary, dividend or expense repayment
- Isn’t money you’ve previously loaned or paid into your company
What is a director’s loan account?
A director’s loan account is a thorough record of any money you borrow from the company.
Your director’s account should also keep a record of any money you put into the business. This way, it’s easier to keep a record of all the money moving between you as an individual and your company.
A director’s loan account isn’t a real bank account. It’s a virtual account that exists in your accounting records.
When would I use a director’s loan account?
If your company lends you money, or you pay for items on behalf of the company, then you’ll want to manage a director’s loan account.
You should include a record of director’s loans, both money you owe the company and money the company owes you, in the balance sheet section of your annual accounts.
Director loan tax responsibilities
Your personal and company tax responsibilities will depend on whether the director’s loan account is overdrawn (in which case you owe money to the company) or in credit (where the company owes you money).
If you owe the company money
If you take a director loan then either you or your company might have to pay tax.
If you pay off your director’s loan account before your company’s accounting period, then your company doesn’t need to pay tax on the loan and you don’t need to include anything on your Company Tax Return.
If you pay off the director’s loan account within 9 months of the end of the accounting period, then your company still doesn’t need to pay tax on the loan but you’ll have to include details of it on your Company Tax Return. You’ll need to use the CT600A form to show the amount owed.
If you only pay back part of the director’s loan within 9 months of your company’s year-end, then you’ll have to pay tax on the remaining balance.
If you don’t repay within 9 months, then the company should then pay 25% of the amount owed as Corporation Tax. If the director took a loan from the company after 1 April 2016, then tax (known as section 455) is payable at a 32.5% instead of 25%. Interest will be added to the Corporation Tax until either it, or the full loan, is paid. You’ll be able to reclaim the Corporation Tax but not the interest.
If you don’t repay the loan (it’s “written off”) then the company needs to deduct Class 1 National Insurance through payroll. As the director, you personally have to pay Income Tax on the loan as part of your Self-Assessment return.
You might have extra tax responsibilities if the loan exceeds £10,000 or you paid your company interest on the loan that was below the official interest rate.
If your director’s loan exceeds £10,000 at any point in the year, then it should be classed as a benefit in kind. This means it should be included on your P11D form.
If you paid below the official interest rate, and you’re a director or shareholder, then your company needs to record the interest you pay as company income. It also needs to treat the discount interest as a ‘benefit in kind’.
As recipient of the lower interest rate, you’ll have to record the interest on your Self-Assessment form. You may also have to pay tax on the difference between the amount you paid and the official rate.
If the company owes you money
If you give a loan, then your company won’t pay Corporation Tax on any money you lend it.
If you charge your company interest on the loan, then it’ll count as a business expense for your company and a personal income for you. This means you’ll have to report it on your Self-Assessment tax return.
If you charge interest, then your company will have to pay you the interest minus the basic Income Tax rate of 20%. The company will have to report this Income Tax quarterly, using the CT61 form.
Creating a Director’s Loan Account in KashFlow
To make sure you’re fully compliant with HMRC, it’s important to make sure your accounts are properly updated. In KashFlow’s Accounting Software, this can be done in a couple of steps.
To start, set up a new Directors Loan account by going to Bank > Add New Account. The three most important fields you should enter on the next page under are;
- Account Name– This should easily identify the bank account, i.e. ‘Jane’s Director’s Loan Account’
- Start Date– This should be a date before the first transaction. To make things easy we advise that you enter 01/01/1970 here.
- Starting Balance– This should be 0.00
When you’re done, click Add Account. You’re directors loan account is now ready to use.
Recording a Loan
To record a loan from the company to the director you can do that by doing a bank transfer. This transfer represents the amount of money the company has given to you and allows you to reconcile your currency account easily.
To do this go to Bank > Transfer Money. Use the options here;
- Date– Enter in the date that you withdrew/transferred the money from the business account to yourself
- Amount– Enter in the amount withdrawn or transferred
- From– This will be the business bank account where the funds originally came from
- To– This will be your directors loan account
- Comment– to make this easy to reconcile you can enter in something like ‘Loan for Stationary′ or similar.
When you reimburse yourself, simply Transfer money for the Director’s Loan to the Business account. Then the balance will ideally be set back to zero by going to the Bank > Transfer Money button.
Use the options here:
- Date– Enter in the date that you deposited the money back into the business account
- Amount– Enter in the amount deposited or transferred
- From– This will be the directors loan account
- To– This will be your business account
- Comment– to make this easy to reconcile you can enter in something like ‘Director’s Loan Repayment’ or similar