A director’s loan account is the running balance of all payments out of a business which do not relate to the business activities less any amounts paid on behalf of the business via personal sources, and if an overdrawn loan is not repaid within 9 months of the financial year-end this is where problems can arise.

We always recommend keeping business and personal transactions separate and running them through different bank accounts as there is no benefit to either you or us having to spend time separating this activity, and it keeps things much simpler all around. But we know sometimes in the real world this just doesn’t happen…

So as a simple example, if you draw money from the business to pay for a family holiday, the payment is not treated as a travel expense because it is personal in nature. At this point the business has loaned you money and so the amount goes into the directors loan account.

If you know the business has post-tax profits and/or accumulated reserves then the drawing can be covered by a dividend to the shareholders, then there is no problem for the company.

But do you know that is the case? For this, you need up to date financial records which are accurate and as complete as can be.

Another way to repay an overdrawn loan is through a cash injection by the director within the 9 month window after the year-end, but this may not be the most practical option.

Whichever option is ultimately used, you will want to know that the most tax efficient outcome for the company and its directors & shareholders has been arrived at. Remember that dividends will be taxed on the individual and everyone’s circumstances can differ, so getting proper advice is essential.

If some or all of the director’s loan is not repaid within the 9 month window, a tax is payable to HMRC by the company on this balance. It is called S455 tax and the current rate is 33.75%. It is payable at the same time as corporation tax on profits. Do note that your business may make a trading loss and not have any corporation tax to pay, but may still have to pay S455 tax if a director’s loan balance is not repaid.

Should S455 tax be payable, it can eventually be reclaimed after partial or complete repayment of the director’s loan to the company, but not until 9 months after the financial year in which the loan is repaid. This is where the significant negative cash flow impact can be seen.

Additionally, if the loan exceeds £10,000 at any point in the year interest of 2.25% is charged on the loan. HMRC recently announced this official rate on beneficial loans would be frozen for 2024/25, which was a positive surprise as there was an expectation from many that this rate would increase like most other interest rates have.

We believe that if managed correctly, director’s loans can be advantageous, but if the business bank account is treated as a personal bank account with no consideration for whether the loan can be repaid and when this would happen then the company can create all sorts of financial problems for itself and its directors.

Good cash flow management and having an accurate overview of how your business is performing, including understanding the movement in your director’s loan account, is essential in being able to manage the finances of the business and can be the difference between whether it thrives or finds itself in financial trouble.

Making the decision to receive our proactive advice is an important step you can take today to help secure the future of your business.

The above is just a taster of some of the important factors to be aware of so to find out more, email Rob in our Business Support Unit or call us on 020 8863 4566 to speak to one of the team.

The above is just a taster of some of the important factors to be aware of so to find out more, email Rob in our Business Support Unit or call us on 020 8863 4566 to speak to one of the team.