Director’s loan accounts keep track of money moving between directors and their limited companies. When a director pays a company bill personally or takes company money for a personal cost, the transaction needs a clear record. It does not automatically become salary, a dividend or a business expense.
What goes into director’s loan accounts?
The account can record money you lend to the company, company costs you pay from personal funds, personal costs the company pays for you and withdrawals that are not salary, dividends or repayment of money the company already owes you. Each entry should have a date, amount, description and supporting document.
For example, if you personally pay a £300 company software bill, the company may owe you £300, assuming the cost is genuinely a company expense. If the company later reimburses you, that reduces the balance. If instead the company pays a personal holiday deposit, that amount may be owed by you to the company. The two transactions should not be hidden among ordinary business costs.
Why director’s loan accounts matter
An account showing that the company owes you money is different from one showing that you owe the company. When you owe money to the company, the balance and the timing of repayment can have company tax and personal tax consequences. Other rules may apply where a loan is large or interest-free. The details depend on the amount, the company’s year end and how the money was taken.
A common problem is treating every transfer to a director as a dividend. Dividends require sufficient distributable profits and appropriate records. A bank transfer alone does not establish that a valid dividend was paid.
Keep the records current
Review the director’s loan account monthly, especially if you use a company card for mixed purchases or pay suppliers personally. Reconcile the account before the company year end, and discuss any overdrawn balance early enough to consider your options properly. Retain invoices, receipts, dividend paperwork and details of repayments.
HMRC’s director’s loans overview explains the basic rules. AA&R Certified Accountants can help you separate salary, dividends, expenses and loans in your records. Get in touch if the balance is unclear or you want to review it before your year end.
Related reading: St Albans Consultant Pay: Avoid a Tax Surprise.