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Director’s loan account – it’s not free money!

A director’s loan account is like a bank account to a limited company that is exclusively for the money you, as a director, lend or borrow to/from it.

If you loan the business money, you are a creditor of the business and any money paid back to you is non taxable.

If you owe the business money there can be tax consequences for both the business and you as a director.

At the business year end, if you have a balance outstanding then that amount needs to be repaid within 9 months of the year end or there will be a corporation tax charge at 33.75%. If you repay the loan then there is no tax due.

However, it’s not that black and white though (it’s tax!). If the loan account is over £5k and you repay the loan, but you then take a further loan of £5k or more in the 30 days before or after repaying the loan then corporation tax will once more become payable. If the balance of the loan at year end is more than £15k and another loan was arranged when you repaid it, then corporation tax is still payable.

During the business’ financial year if your director’s loan account goes over £10k, and you are also a shareholder, then either interest at the official rate of interest (HMRC) should be charged (income to the business) or the value of the interest not charged is a benefit in kind to the director to be reported on their next P11D.

The key is to have your accounts regularly reviewed with your accountant and discuss your director's loan account, plus any dividends that could be issued to reduce or pay it off. This will go a long way to ensuring you don’t fall foul of the rules and end up paying unnecessary tax..

If you are interested in our accountancy services which incorporate quarterly MOTs then book an initial complimentary meeting.

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