How director's loan accounts work, including tax implications and risks

How do director’s loan accounts work?

When a director borrows money from the company, the amount is recorded as a debit on the director’s loan account. When the director repays the money, the amount is recorded as a credit on the account. If the director has borrowed more money from the company than they have repaid, the account is said to be overdrawn.

There are two main types of director’s loan accounts:

• Repayment-free loan accounts. These are accounts where the director is not required to repay the loan to the company. The company may choose to set up a repayment-free loan account if the director is providing a personal guarantee for the company’s debts.
• Repayment-on-demand loan accounts. These are accounts where the company can demand that the director repay the loan at any time. The company may choose to set up a repayment-on-demand loan account if the director is borrowing money from the company to invest in the company or to help the company with cash flow problems.

What are the tax implications of director’s loan accounts?

The tax implications of director’s loan accounts can be complex, and it is important to seek professional advice. However, in general, interest that is charged on an overdrawn director’s loan account is taxable income for the director. Additionally, if a director’s loan account is not repaid within nine months of the company’s accounting year end, the director may be liable to pay National Insurance contributions on the amount of the loan.

For example, let’s say that a director borrows £10,000 from the company and does not repay the loan within nine months of the company’s accounting year end. The director will be liable to pay income tax on the interest that is charged on the loan, even if the loan is not repaid. The director will also be liable to pay National Insurance contributions on the amount of the loan.

What happens if I overdraw by more than £15,000?

If you overdraw your director’s account by more than £15,000, you may be subject to additional tax charges. This is because the government considers loans of this size to be more likely to be used for personal expenses rather than business purposes.

The exact amount of tax you will owe will depend on your individual circumstances, but it could be as much as 33.75% of the amount of the loan.

In addition to the tax charges, you may also be at risk of being disqualified from acting as a director of a UK company. This is because the government considers loans of this size to be a sign of poor financial management.

If you are considering overdrawing your director’s account by more than £15,000, it is important to seek professional advice to understand the potential risks and consequences.

What are the risks of director’s loan accounts?

There are a number of risks associated with director’s loan accounts. These include:

• Personal liability. If the company is unable to repay its debts, the director may be personally liable for those debts. This is because the director is considered to be a creditor of the company, and creditors have a right to be repaid before shareholders.
• Tax implications. As mentioned above, interest that is charged on an overdrawn director’s loan account is taxable income for the director. Additionally, if a director’s loan account is not repaid within nine months of the company’s accounting year end, the director may be liable to pay National Insurance contributions on the amount of the loan.
• Disqualification. If a director does not repay an overdrawn director’s loan account within nine months of the company’s accounting year end, they may be disqualified from acting as a director of a UK company.