Most business owners first learn about Directors Loan Accounts is when they’re sat with their accountants to discuss their Ltd Company year-end accounts. It’s not something that is always discussed. If you’re unsure about them and need a little more information, hopefully, this article will answer some of your questions.
Directors Loan Account Simplified
Put simply, a Directors Loan Account is a record of how much money your limited company owes you or that you owe your company. It shows the amount left for you to withdraw free of tax from your company, or if you’ll need to reimburse if you’ve taken too much out.
How Does It Work?
Think about your bank account or your petty cash account; money gets paid in and comes out. You’re left with a balance so you can see the amount left once your income and outgoings are done.
A Directors Loan Account works the same way. Money goes in and comes out again. The balance is there too – only difference being that it’s not a real account. This is why you might not be aware of it as the year passes. If your bookkeeping isn’t done on a regular basis, it’s difficult to check. This is why you’re probably only aware of it when your bookkeeper has completed your bookkeeping or your year-end accounts are finalised.
What Goes In?
When your limited company is initially set up the money that goes into your Directors Loan Account will be any initial capital that you’ve paid in. This could be in the form of:
- Personal loans that you’ve taken out, personal savings that you’ve introduced to give the Ltd Company money to kick-start things.
- Equipment purchased by the company from yourself
As your Ltd company begins trading, the money that goes into the account can be anything that you’ve paid for on the companies behalf. On the other hand, it could be money that the company owes to you. Examples of this could be:
- Director’s salary if you run the payroll and don’t take the money
What Goes Out?
When there’s money coming in there’s money going out too. During the year you’ll likely take money out of your Directors Loan Account. This is typically outgoings such as:
- Personal expenses. For example; fuel, insurance for cars, food and drink
- Small withdrawals of cash
- Regular direct debits that aren’t used as salaries or dividend amounts
- Donations made in your name
When The Company Owes You Money
Money owed to you by the Limited Company is classified as a loan.
It’s your money and you can withdraw it at whatever time you like. No tax needs to be paid on it as it’s seen as the company repaying a loan from you.
When You Owe The Company Money
Simply put, you should avoid owing your company money.
HMRC see you being able to borrow money from your company as huge perk, so as you can imagine they don’t like it all that much.
Try and pay it back as quickly as you can. If you, the director, are a shareholder then look into taking more dividends. To do this, you’ll need to have the profit in the limited company. These dividends are taxed as additional income to you.
If you owe the company anything over £10k and you can’t pay it back within 9 months of the financial year-end it will become subject to a corporation tax charge known as S455 tax. It will be repaid by HMRC when you’re able to prove the loan has been fully repaid.
If you need more information on this, or any other business finance issues don’t hesitate to get in touch with the team today!
Call us on 01427 613613
Email us on firstname.lastname@example.org
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