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Director’s loan accounts – Getting it right

Director’s loan accounts are a tool that records the transactions between a director and their personal or family company. 

During the pandemic, many business owners have had to rely on loans from their business to boost their income or conversely put money back into the company from their personal finances.

What is a director’s loan?

A director’s loan is when you, or other close relatives, receive money from your business that is not a wage, dividend or expense repayment, or money that you have previously paid into or loaned the company.

In some cases, a director may also lend the company money to fund day-to-day trading, or perhaps for the purchase of assets rather than investing the money in share capital.

How does a director’s loan account work?

Through a director’s loan account, you enter any money you either borrow or pay into your business.

This information must be included in your annual reports by recording how much you or your company owes one another on a ‘balance sheet’.

Do director’s loans attract tax?

When a director takes more money out of the company than they put back in, the loan account can become overdrawn. 

Money should be paid back within nine months of the end of the accounting period to prevent a significant tax bill from arising.

If you’re a shareholder and director and you owe your company more than £10,000 your company must:

  • Treat the loan as a ‘benefit in kind’
  • Deduct Class 1 National Insurance.

This must also be recorded on your tax return and may result in tax on the loan at the official rate of interest.

What is a close company?

A close company is a privately owned and controlled business, which is done so by no more than five individual participators.

The majority of smaller and family-owned businesses are classed as close companies but you should check as it could affect your ability to write off loans.

Writing off a director’s loan account

Close companies can write off a director’s loan. If the director is also classed as a participator, i.e., a person who has a financial interest in the business with regards to sharing capital of the company, rights to assets on winding up, and voting power, then the director’s loan should be subject to a distribution of profits. 

If the beneficiary of the loan is not a participator, the outstanding loan will be subject to tax as employment income. 

If you need assistance with director’s loan accounts, please contact our specialist accounting team at enquiries@stca.co.uk or 01494 552100 or your usual Seymour Taylor representative today.

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing 03 December 2021.