Directors Loan Account
What is a director’s loan account, in its simplest form it is withdrawals or deposits it makes to the business that are outside salary, dividends and an expenses repayment. This can be a credit balance where a director lends the company money or an overdrawn amount where this is a negative amount where is has been withdrawn from the company.
Where a director has an overdrawn Directors Loan Accounts this will be a debit account in the financial statements but if it is a credit balance the company owes the director the balance and can be withdrawn at any time withy out incurring any tax charges.
Corporation Tax Charge
Where there is an overdrawn director’s loan account this an interest free loan and the tax charge in this is known as section 455 tax charge and this is charged at 33.75% on whatever the balance at the company year-end or period end if less than one year.
The tax charge on this is additional to the corporation tax that is due for the year, and if this is repaid within 9 months from year end this is then HMRC repays the tax back.
Benefit in Kind
There is other tax charged on overdrawn director’s loan account as this is known and a benefit in kind and it is reported on P11d form. If the director’s loan account never exceeds £10,000 then there is no benefit in kind.
Directors Loan Account in Credit
If a director’s loan is in credit, then the director can charge the company interest on the amount in credit on the same principle as if it went to their bank for a loan or overdraft. If they charge the company interest, then form CT61 is used.
This is taxable income at the relevant tax rate 0%,20%,40% or 45% declared on their self-assessment tax return.
If the interest is less than £1,000 then this is taxed at 0%.
By the company paying a dividend this is one way that the overdrawn loan account can avoid being overdrawn as the amount of the dividend is then credited to the loan account, but dividend payment may also not be possible if there are insufficient accumulated profits available out of which to pay the dividend.
Dividends are taxed at 8.75%, 33.75% or 39.35% but there is no National insurance on dividends.
When paying dividends, it is important to keep minutes of board meeting relating to the dividends being voted and share certificates issued to the shareholders or directors id they are director shareholders of a private limited company.
Accounting Disclosure Requirements
Companies Act 2006 section 413 provides for disclosure of the details of any advance or credit granted by the company to its directors.
The details required are the amount of the loan granted during the year, an indication of the interest rate, its main condition and any amount repaid or written off. In the notes to the accounts must also be stated the total amount of the loan and the total amount of interest charged. Disclosure for transaction with the directors is also required under FRS 102: Related Party Disclosures and FRS 105: Notes to the Financial Statement.
If you need any further information, please reach out and one of the team will contact you.