Director's loan accounts: the rules in plain English

A director's loan account sounds technical, but most owner-managed companies have one. It is simply the running balance between you and your company: money you put in or take out that is not salary or dividend. The rules around it are strict, and getting them wrong triggers tax charges that surprise directors every year.

Company director reviewing loan account records

How the account works

When you pay company expenses personally or lend the company money, the company owes you, and the account is in credit. When you take money out beyond salary and dividends, you owe the company, and the account is overdrawn. The problems all live in that overdrawn territory.

The 9-month repayment rule

If your loan account is overdrawn at the company's year end, you have nine months and one day to repay it or face a Section 455 charge at 33.75 percent of the outstanding amount. The charge is repayable when the loan is cleared, but it is still cash out of the business and a red flag to HMRC. Diary the deadline the day the accounts are signed.

The bed-and-breakfast trap

Repaying the loan just before the deadline and re-borrowing shortly after does not work the way directors hope. Anti-avoidance rules treat repayments followed by new borrowings within 30 days, or arrangements totalling over £15,000, as if the original loan was never repaid. HMRC has seen every version of this; do not be creative with it.

Benefit-in-kind on larger loans

Overdrawn balances above £10,000 at any point in the tax year create a taxable benefit, reported on the P11D and charged to Class 1A National Insurance for the company. Interest should be charged at HMRC's official rate at minimum; interest-free loans to directors are where the benefit charge bites.

Keep it boring and documented

The compliant version is dull: a written loan agreement, interest at the official rate, regular statements, and clearance within nine months. Review the balance at every board meeting, even if the board is just you. When the bookkeeping is clean, the director's loan is a useful flexibility tool; when it is not, it is a tax bill waiting to happen.

Finex Outsourcing keeps the ledgers and tax compliance services behind UK owner-managed companies, so loan accounts stay documented, in credit where possible, and never a surprise.


 

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