Directors LoanMerranti

What Is a Director’s Loan Account and How Do You Keep It Under Control?

A director’s loan account records money moving between a company and its director.

It is used when money is borrowed from or paid into the company and the transaction is not salary, dividends, expense repayment or repayment of money previously lent.

The key point is this: company money is not personal money. A limited company is separate from its directors and shareholders, so money taken from the company needs to be recorded properly.

Director’s loan accounts are not automatically a problem. Many directors lend money to their companies, especially during start-up or difficult cash-flow periods. Problems usually arise when directors take money out of the company without checking whether it should be salary, dividends, expenses or a loan account movement.

For limited company accounting support, see Merranti’s Limited Company Accounting page.

What is a director’s loan account?

A director’s loan account is a record of money owed between the director and the company.

The account can move in two directions.

If the director lends money to the company, the director’s loan account is usually in credit. This means the company owes the director money.

If the director takes money from the company that is not salary, dividends, expense repayment or repayment of a previous loan, the director’s loan account may become overdrawn. This means the director owes money to the company.

GOV.UK says companies must keep a record of any money borrowed from or paid into the company, and this is usually known as a director’s loan account. Useful outgoing link: GOV.UK: Director’s loans.

What counts as a director’s loan?

A director’s loan can arise where a director or close family member receives money from the company that is not:

  • salary
  • dividend
  • expense repayment
  • repayment of money previously paid into or loaned to the company

It can also arise where the director pays money into the company or pays company costs personally and the company has not yet reimbursed them.

Common examples include:

  • the director lending personal money to the company
  • the company repaying money previously lent by the director
  • the company paying a director’s personal bill
  • the director using the company card for private spending
  • the director withdrawing cash from the company
  • business expenses paid personally by the director
  • dividends credited to clear money already taken
  • salary or bonus entries posted after withdrawals have been made

Every transaction between the director and company needs a clear category.

Director’s loan account in credit

A director’s loan account is in credit when the company owes the director money.

This might happen if the director:

  • paid company expenses personally
  • introduced start-up funds
  • lent money to cover cash-flow gaps
  • bought equipment personally for the company
  • paid supplier bills from personal funds

If the account is in credit, the company can usually repay the director without that repayment being treated as salary or dividends, because the company is repaying money it already owes.

However, the records still need to be clear. The company should be able to show why it owes the director money and where the original payments came from.

GOV.UK says a company does not pay Corporation Tax on money a director lends to it. If the director charges interest, the company treats the interest as a business expense and the director treats it as personal income. Useful outgoing link: GOV.UK: If you lend your company money.

Director’s loan account overdrawn

A director’s loan account is overdrawn when the director owes money to the company.

This often happens when directors take money out informally.

Examples include:

  • taking regular withdrawals without payroll or dividends
  • paying personal bills from the company account
  • using the company card for personal shopping
  • taking dividends before checking available profit
  • treating company money like drawings
  • failing to record salary or dividends properly
  • not reimbursing personal spending

This is common in owner-managed companies because the director may feel that the business money is “theirs”. Legally, it belongs to the company until extracted correctly.

An overdrawn director’s loan account can create tax consequences, so it should be reviewed before the company year-end, not only when accounts are due.

For year-end accounts support, see Merranti’s Annual Accounts page.

Why overdrawn director’s loan accounts cause tax problems

An overdrawn director’s loan account can create issues for both the company and the director.

GOV.UK states that if a director does not repay a loan within 9 months of the end of the Corporation Tax accounting period, the company may need to pay Corporation Tax at 33.75% of the outstanding amount, or 32.5% for loans made before 6 April 2022. The company may be able to reclaim this Corporation Tax later after the loan is repaid, written off or released, but not the interest. Useful outgoing link: GOV.UK: If you owe your company money.

This can create a cash-flow problem. Even where the tax can eventually be reclaimed, the company still has to fund the payment first.

The 9-month rule

The 9-month rule is one of the most important director’s loan account points.

If the director owes money to the company and the loan is not repaid within 9 months of the end of the company’s Corporation Tax accounting period, the company may face the additional Corporation Tax charge.

For example, if a company’s accounting period ends on 31 March, the key date is usually 1 January the following year.

Directors should not wait until the Company Tax Return deadline before reviewing this. The loan account should be checked before year-end and again before the 9-month point.

Loans over £10,000

A director’s loan can also create benefit-in-kind issues.

GOV.UK says that if a shareholder-director owes the company more than £10,000 at any time in the year, the company must treat the loan as a benefit in kind and deduct Class 1 National Insurance. The director must report the loan on a personal Self Assessment tax return and may have to pay tax on the loan at the official rate of interest. Useful outgoing link: GOV.UK: If you owe your company money.

This is another reason to monitor the loan account during the year, not only when the accounts are prepared.

For personal tax return support, see Merranti’s Self Assessments page.

What if the loan is written off?

Writing off a director’s loan is not a simple fix.

GOV.UK states that if a loan is written off or released rather than repaid, the company may need to deduct Class 1 National Insurance through payroll, and the director may need to pay Income Tax through Self Assessment. Useful outgoing link: GOV.UK: If you owe your company money.

This means a loan write-off should be reviewed carefully before any decision is made.

For payroll support, see Merranti’s Payroll page.

Director’s loan vs salary

A director’s loan is not the same as salary.

Salary is payment for work done for the company. It is usually processed through payroll and may involve PAYE, National Insurance and employer reporting.

A director’s loan is money owed between the director and company. It is not automatically income when taken, but it can create tax issues if not repaid or if it becomes a taxable benefit.

Salary should be planned through payroll. It should not be guessed after money has already been withdrawn.

Director’s loan vs dividends

A director’s loan is also not the same as dividends.

Dividends are payments to shareholders from company profits after Corporation Tax. They should only be paid where the company has sufficient distributable profit and proper paperwork.

A common problem is where directors take money during the year and later try to treat the withdrawals as dividends. That may be possible only if the company has enough profit and the dividends are properly declared.

Before using dividends to clear a director’s loan account, the company should check:

  • current profit
  • retained profit
  • previous losses
  • Corporation Tax estimate
  • dividends already paid
  • available cash
  • shareholder structure
  • dividend vouchers and board minutes

If the company does not have enough profit, the withdrawals may remain as an overdrawn director’s loan account.

How director’s loan accounts link to cash flow

Director’s loan account problems often point to wider cash-flow issues.

If a director is taking money without checking profit, tax and available cash, the company may struggle later with:

  • Corporation Tax
  • VAT
  • payroll
  • PAYE
  • supplier bills
  • loan repayments
  • dividends
  • working capital

A company may look cash-rich because customers have paid or VAT has been collected, but that does not mean the cash is available for the director to take.

For cash-flow forecasting and regular reporting, see Merranti’s Financial & Management Accounts page.

How bookkeeping helps control the loan account

Good bookkeeping is essential.

A director’s loan account can become inaccurate if transactions are not recorded properly.

Common bookkeeping issues include:

  • personal costs coded as business expenses
  • director expenses not reimbursed correctly
  • salary posted incorrectly
  • dividends missing from records
  • bank transfers not explained
  • credit card spending not reviewed
  • receipts missing
  • loan repayments treated as expenses
  • business costs paid personally but not recorded

Monthly bookkeeping makes the loan account easier to control. If the account is reviewed only after year-end, options may be more limited.

For digital bookkeeping support, see Merranti’s Accounting Software and Cloud Accounting pages.

Practical ways to keep a director’s loan account under control

Directors can reduce risk by following a few simple habits.

Keep personal and company spending separate

Do not use the company bank account as a personal bank account. If personal spending happens accidentally, record it properly.

Review the loan account monthly

Do not wait until the accounts are due. Monthly checks help spot problems early.

Plan salary and dividends before taking money

Decide how money will be extracted before it is withdrawn.

Keep dividend paperwork

Dividends should be supported by board minutes and dividend vouchers.

Estimate Corporation Tax before dividends

Dividends are paid from post-tax profit. Corporation Tax should be estimated before deciding what can be distributed.

Reimburse expenses properly

If a director pays business costs personally, keep receipts and reimburse them clearly.

Avoid informal drawings

Drawings may be normal language for sole traders, but a limited company needs each withdrawal categorised properly.

Speak to an accountant before year-end

If the loan account is overdrawn, earlier advice gives more options.

Director’s loan account checklist

Directors should review:

  1. Has the company paid any personal costs?
  2. Has the director paid company costs personally?
  3. Are expense claims supported by receipts?
  4. Have dividends been properly declared?
  5. Is there enough profit for dividends?
  6. Has Corporation Tax been estimated?
  7. Has salary been processed through payroll?
  8. Has the director taken informal withdrawals?
  9. Is the loan account overdrawn?
  10. Has the £10,000 benefit-in-kind point been considered?
  11. Is the 9-month repayment deadline relevant?
  12. Is the company holding enough cash for tax and bills?
  13. Do the accounts show the correct balance?
  14. Does the director understand how the balance arose?
  15. Is action needed before year-end?

Useful further reading and links

Useful outgoing GOV.UK links:

Suggested Merranti service links:

How Merranti can help

Director’s loan accounts are manageable when they are tracked properly. They become risky when directors take money informally, mix personal and company spending, or wait until year-end to review the balance.

Merranti Accounting can help review director’s loan accounts, bookkeeping, salary, dividends, Corporation Tax, payroll, Self Assessment and management accounts.

If you are worried about a director’s loan account, visit Merranti’s Limited Company Accounting page, see Annual Accounts, or contact Merranti to discuss your company.

FAQ

What is a director’s loan account?

A director’s loan account records money borrowed from or paid into a company by a director. It shows whether the director owes the company money or the company owes the director money.

When is a director’s loan account overdrawn?

A director’s loan account is overdrawn when the director owes money to the company. This can happen if money is taken out and not treated as salary, dividends, expenses or loan repayment.

Is an overdrawn director’s loan account bad?

It is not automatically bad, but it can create tax, interest, benefit-in-kind and cash-flow issues if it is not managed properly.

What is the 9-month rule for director’s loans?

If an overdrawn loan is not repaid within 9 months of the end of the Corporation Tax accounting period, the company may need to pay additional Corporation Tax on the outstanding amount.

Can dividends clear a director’s loan account?

Dividends may be used to clear a loan account only if the company has enough distributable profit and the dividends are properly declared and documented.

Can Merranti help with an overdrawn director’s loan account?

Yes. Merranti can review the loan account, bookkeeping, dividends, salary, Corporation Tax, payroll and Self Assessment position to identify the best next steps.

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