Understanding the directors loan account. Directors current account

A concise guide to understanding the Director’s Loan Account

Posted on 18th July 2023 by Phil Ainley

Many professionals pursue their dream and start their own business, with many taking the option to register as a Limited company.

Registering as a Limited company can mean that if something goes wrong with the products and services you provide to a client, then your personal assets should be secure if a claim is made against you.

The law relating to tax can be complicated in relation to a director’s affairs. Many new business owners don’t understand the financial implications that come with being a Limited company director.

It is very different from being a sole trader business owner and can take people by surprise if they are not aware of the differences before they make the switch from sole trader to Limited company.

In this article, we look at the Director’s Loan Account, also known as the Director’s Current Account. We look at what it is and what the financial obligations of it are.

What is the Director’s Loan Account?

A director’s loan is when you, or other members of your family, receive money from your company that is not one of the following:

A salary, dividend or expense payment.
Money that you have previously paid into the company or loaned to the company.

As a Limited company director, you must keep a record of all money you borrow from, or pay into, the company. This record is typically known as a ‘Director’s Loan Account’.

How does a Director’s Loan Account work?

A Director’s Loan/ Current Account typically includes the following attributes:

A balance brought forward at the start of the year.
Funds that are owed to the director are added to this account balance (credited). Examples include: the director’s gross salary, dividend voted (if the director is a shareholder), expenses paid out by the director for the company’s benefits, funds introduced to the company personal the director’s personal account.
Funds that the director has taken out of the company are deducted from the account balance (debited). Examples include: directors PAYE tax and National Insurance deducted from gross salary, dividends withdrawn, expenses paid out to the director, cash funds that have been withdrawn by the director for personal use.
A balance carried over at the end of the year.

Example of a director’s loan account that is in credit

Balance brought forward, in credit	£1,000
Add total due to director from company	£30,000
Subtract total taken out by director	£20,000
Balance carried over, in credit	£11,000

Example of an overdrawn director’s loan account <h3>

Balance brought forward, in credit	£1,000
Add total due to director from company	£30,000
Subtract total taken out by director	£40,000
Balance carried over, overdrawn	£9,000

What are the taxes on director’s loans?

You may have to pay tax director’s loans and your company may also need to pay tax if you are a shareholder as well as a director.

Your tax responsibilities will depend on whether the director’s loan account is in credit or if it’s overdrawn.

Director’s loan account in credit

If the director’s loan account is in credit (if you lend the company money), your company will not have to pay corporation tax on any money you lend to the company.

If you charge interest on the money you lend to your company, the interest counts as both:

a business expense for your company.
a personal income for you.

Therefore, you must report the income on a personal Self Assessment tax return.

Your company must pay you the interest less Income Tax at the basic rate of 20% and report and pay the Income Tax every quarter using form CT61.

Director’s loan account overdrawn

If the director’s loan account is in debit (if you owe the company money), then you or your company may have to pay tax. Your personal and company tax liabilities depend on how the loan is settled.

You also need to check if you have extra tax responsibilities if:

the loan was more than £10,000.
you paid your company interest on the loan below the official rate (actual official rate is 2.25% from 6 April 2023).

Repaying the director’s loan

	Your business’s responsibilities if you’re a director and shareholder	Your personal responsibilities if you get a director’s loan
You repay the loan within nine months.	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. After 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.
You do not repay the loan within 9 months of the end of your Corporation Tax accounting period.	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.
The loan is ‘written off’ or ‘released’ (not repaid) including if the company goes into liquidation.	Deduct Class 1 National Insurance through the company’s payroll.	Pay Income Tax on the loan through a Self Assessment tax return.

Table source: Gov.uk. Information correct as of July 2023.

What are the key implications of an overdrawn director’s loan account?

Reporting transactions – All loan transactions with directors must be displayed in the company’s accounts and reported to HMRC.
Additional tax – If the director’s loan account is still overdrawn nine months after the year end, then the business must pay additional corporation tax known as a S455 payment.
S455 payment – The S455 payment will be in addition to the corporation tax payable on the company’s profits, and is payable whether the company makes a profit or not.
Benefit in kind – The director would also have to pay tax on the ‘benefit in kind’ received if they did not pay interest to the company for the money borrowed. The ‘benefit in kind’ effectively replaced the interest that a bank would charge for a loan.
Company insolvency – If the company becomes insolvent, the director will be required by the liquidator to repay the money owed to the company. Insolvency at a time when the director’s loan account is overdrawn can result in greater scrutiny by the liquidator and HMRC, in case there has been a breach of duties by the director in question. That’s when directors and officers insurance can become important.

Why would I need directors and officers insurance?

Many directors believe they have no personal liability. Yet directors, managers and supervisors can face allegations and legal proceedings for which they can be held personally liable if they have acted without proper authority or have breached the Companies Act 2006. Only shareholders have limited liability.

Directors & Officers insurance (D&O) can provide cover for claims from creditors, employees, regulatory bodies (including the Health & Safety Executive and Her Majesties Revenue & Customs), customers and suppliers.

The policy offers protection for a director’s personal assets in the event of a claim of actual or alleged “wrongful acts” when acting within the scope of their managerial duties.

The cover provided under the Caunce O’Hara D&O policy provides cover from £250,000 up to £1,000,000 and is included as part of the business combined liabilities insurance policy. The policy effectively removes the financial risk faced by directors and officers, giving them protection should an allegation or claim be made against them.

Considering certain investigations can cost thousands of pounds, can you afford to be without this cover?

Get a quote for your directors and officers insurance today.

Sources:

https://www.gov.uk/directors-loans

https://www.gov.uk/directors-loans/you-lend-your-company-money

https://www.gov.uk/directors-loans/you-owe-your-company-money

https://www.linkedin.com/pulse/what-directors-current-loan-accounts-davern-forensic-accountant-/

How to make the change from sole trader to limited company

Understanding your responsibilities as a company director

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