Directors’ loan accounts: the small balance with big consequences

A director’s loan account records money flowing between you and your company that is not salary, a dividend or a business expense. Personal bills paid from the business account, or cash drawn ahead of a dividend, all land there. A credit balance means the company owes you; an overdrawn balance means you owe the company.

When an overdrawn balance costs tax

If the loan is still outstanding nine months and one day after the end of the company’s accounting period, the company pays a temporary corporation tax charge on it, at the dividend upper rate. It is repaid by HMRC once the loan is repaid, but not with interest, and not quickly.

If you owe the company more than £10,000 at any time in the year, and pay no interest or less than HMRC’s official rate, the loan is a benefit in kind. You pay income tax on it, the company pays Class 1A National Insurance, and it must be reported.

The rules on repaying and redrawing

Repaying more than £5,000 and drawing a similar amount back within 30 days is treated as if the first loan was never repaid. Larger balances face a wider test based on arrangements to redraw. Clearing the balance with a dividend or bonus works, as long as it is properly declared and taxed.

Keeping it tidy

• Pay personal costs personally, not from the business account.
• Review the loan account monthly, not only at the year end.
• Plan dividends with enough reserves to clear the balance before the nine-month deadline.