If you have a limited company you may have heard your accountant mention a director’s loan account. This tends to be a confusing accountancy term that clients sometimes have problems understanding.
The director’s loan account is not a bank account or anything physical, it exists on paper only. It is an account which bridges the company and the director, personally. There will be a director’s loan account for each director in the company.
Transactions which go to this account can include the following:
- Business expenditure which the director has paid for personally but the company is due to reimburse.
- Capital which the director is lending the company.
- Capital which the company is loaning the director.
- Expenditure which the company has paid for, but is of a personal nature.
At the end of the accounting period there will be a balance on the director’s loan account, either the company owing the director, or vice versa. If the director owes the company then we call this an overdrawn loan account.
HM Revenue and Customs don’t like overdrawn loan accounts. If the director’s loan is overdrawn at the end of the accounting period then it must be repaid within 9 months of the end of the accounting period. If it is not fully repaid at this point, then the outstanding balance is taxed at 25%. This tax is repayable 9 months after the end of the accounting period in which the director’s loan account was repaid.
Even if the director’s loan is fully repaid at any point during or after the accounting period has ended then there still may be consequences if a director’s loan is overdrawn in excess of £5,000 at any point during the year. Class 1A NIC is payable on the interest of the loan.
Here at Mark Stanley Accountants we can advise you on this subject, and anything else you are concerned about. We offer you a friendly and affordable service. Give us a call on 01207 582528 and have a chat with our friendly team or drop Alison an email on [email protected].
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