One of the most misunderstood parts of starting or running a limited company is the Directors loan account. While the concept is a little strange, it’s not impossible to get your head around. It’s worth the effect to understand how it relates to your company and how you take money from the business.
What’s a director’s loan account?
The Directors loan account is an accounting record where you keep track of the money a director has given to the limited company or taken out of the company, not in the form of dividends or salary. If a Limited company has many directors, each director will have their directors account.
Putting money into the company
Most businesses will have times when they need some extra cash flow, and one of the best places to get these funds is from one of the directors of the business. When this happens you’re making a loan to the company and company will have to pay you back.
For example, Director 1 deposited £5000 of their money in the business bank account. There would be an accounting record which adds £5000 to the Director’s one loan account.
When the best things about the director’s loan account as you do not have to put money into a bank account to be making a loan to the company. There may be situations when you personally by equipment for business use; this is seen as you making alone to the company, and the value of the equipment is added to your director’s loan account.Is the business has enough funds the director can pay himself or herself back at any time. You’re considered a creditor to the business unlike other creditors you can pay money anytime.
Taking money out of the company using the director’s loan account.
As a director, if you take money out of the company in numerous ways, you can take the form of salary or as dividends. Another way to take money out of business is to take a loan from the company and Account for it in the director’s loan account.Is not an unusual practice for directors to borrow the money from the businesses over the course of the year. As long as the director’s loan accounts are clear off at the end of the financial year then is totally fine. One way of clearing the director’s loan is by issuing a yearly dividend and using that to the balance of the director’s loan account.Using the director’s loan account correctlyIf your director’s loan account is overdrawn by more than £10,000 HM RC classifies this as a benefit in kind. This is because you are receiving alone without paying any interest on it so it must be declared on your personal tax return. The way to avoid having a benefit in kind charge is to pay interest on the money that you borrow from the company to or above HM RC’s official rate.
How to deal with an overdrawn Directors loan account
The communications when profits within the company end up not being enough to fully clear the director’s loan account. This means you have an overdrawn directors loan account or a loan to particulars. If this is the case video requires is a clear it on your corporate tax return, and you may have to pay some extra tax. Since you have nine months to submit your accounts you do have the opportunity to clear your direct loan account during this time if you manage to do this then there is no tax to pay. You still need to add it to your corporate tax returns there is some tax relief on the outstanding amount.If you are unable to pay back the loan fully then you are required to declare the loan on your end of year accounts. Currently, the tax rate is 32.5% for any outstanding director’s loans.