Directors’ Loans Accounts – Please Be Careful

Author – Jason Soars

Apologies for those of you that understand all of this if this seems a little basic, but you would be amazed how many owner managers I speak to who don’t get this. 

I will be honest it has been the source of many difficulty conversations for me. 

I take a look at the numbers, prepare a balance sheet, sit down with the Owner Manager and say  

“According to the records, your Director’s Loan Account is overdrawn by £xxxx” 

The reply is often  

“No it isn’t, that can’t be right, where did those numbers come from? This is the first I have heard of it, Why didn’t anyone tell me” 

So I thought it might be worthwhile outlining the basics on Director’s Loans. 

What are they for? 

Paying yourself 

It is pretty much standard practice that as an owner manager of a business you will have a Director’s Loan Account. 

Normally your accountant will have advised you to pay yourself the maximum tax free amount, this varies depending on circumstances, but lets say its £1,000 per month. 

I doubt that this will be enough, so you will take extra amounts from the business, when you do you are effectively borrowing money from the business. 

Your accountant will have advised you to do this, the plan being to declare a dividend once a year and use this to repay what you have borrowed. 

It makes sense, declaring a dividend every time you need some cash isn’t really practical. 

To spell it out, that means that until you declare the dividend you owe the company money. 

Expenses 

Your accountant is not a mind reader, they can’t tell from an Amazon transaction whether the purchase is for the business or you personally. 

So usually, they code it to the Director’s Loan and then when you tell them what it is for and give them a receipt they move it to the Business. 

The problem comes, when this doesn’t happen regularly. It may seem like a good idea to just code everything to the business, but believe me, you don’t want to end up with HMRC turning up and finding a load of personal expenses in the business, you really don’t. 

Again, to make it simple, if you don’t tell your accountant that you expenses relate to the business you end up owing the business for them. 

Actual Loans 

The final, main item in Directors Loan Accounts is actual Directors loans, where you have put money into fund the business. 

In this situation the business owes you money. 

Risks 

If it all goes wrong you will need to pay it back 

If you Director’s Loan Account is overdrawn (and most are) and the worst happens and the business fails, you will need to pay it back. 

Not a great time and believe me the Administrator won’t just forget about it. 

If it isn’t repaid within 9 months of the year end you get hit with a tax bill 

HMRC, regard overdrawn Director’s Loan Accounts as a benefit in kind. 

So they tax them at 33.75%. 

Seems easy, just declare a dividend right, well yes as long as you have sufficient earnings to do so. 

This isn’t always the case. 

Advice 

The advice is simply 

• Keep on top of it, check the balance and movements on your Director’s Loan Account every month. Understand and fix any issues promptly, don’t leave it to the year end. 

• Understand how much you can afford to draw from the business, if you take more out than the business can afford you end up with problems. 

• Employ a good Fractional Finance Director (sorry couldn’t resist).