What is this thing which my accountant keeps on talking about?
After the financial year end of your limited company, one topic which often gets discussed is something called a Director’s Loan Account. But do you even know what it is?
Let’s go over the key areas.
What is it?
As a small business and if you’re trading as a limited company, that limited company is a separate legal entity.
That means that you personally (Mr or Misses Smith), as the director and owner of a business are separate from your company and any money exchanged within it. Any money which goes into and out of the company via you (Mr or Misses Smith) needs to be recorded in a Directors Loan Account. In layman’s terms, all of the ins and all of the outs between you and your company are registered in this one account. See it as a separate ‘bank’ account within your business that simply records everything which comes in and everything which goes out via you personally.
Money into a Directors Loan Account
What is money into your directors’ loan account? This could be a few things.
1. Salary- any salary that’s been declared on the payroll and filed with HMRC after taxes and other deductions, will go into your Directors’ Loan Account.
2. Dividends- any dividends that have been declared. Dividends don’t have to be paid the same day that they’re declared. So, when a divided is declared (which is a distribution of profit) that amount can go into your director’s loan account as money that’s owed to you. When the money is paid to you, usually via a bank payment, this would then be money out. So see it as dividend declared, money in, but when the this is paid to you – money out.
3. Expenses- all of us do it and it’s legitimate. We pay for expenses out of our own pocket and if they are wholly and exclusively for the business, we are legally allowed to claim them and then receive tax relief on the expenditure. That is the third line on the Directors’ Loan Account. That’s money in where you’ve paid expenses out of your own pocket but is a legitimate company expense, such as use of home as office, mileage etc. Therefore the funds spent are due back to you.
4. Interest on your loan account for credit balances. A credit balance is an amount of money that the company owes you. If you’ve got tens of thousands of pounds sitting in your Directors Loan Account you can if you wish, nominate that you charge interest on this balance at a commercial rate. That interest will need to go on your personal self-assessment tax return as income and will be an expense in the limited company. Sometimes it can be a great tax planning tool to do this. But Together We Count will look at your overall affairs to establish if this is advantageous.
Money Out from your Directors Loan Account
Money out is everything you’ve drawn out of the business. That could be cash, petty cash, bank transfers, cheques, stock that you’ve paid yourself. If you’ve taken money out of the business that will be money out of your Directors Loan Account.
Net of Income Plus Outs
The net, which is all of the ins less the outs. The balance which is all of the sum of what you’re entitled to and what you’ve taken. That will leave a balance where you owe the company or the company owes you. Things to be wary of as a business owner, it’s dead easy to sometimes get your card out and spend saying something like “it’s alright, it’ll go on my loan account”. This can be a black hole. This can be a really bad habit. If you’re out of control of this, you can sometimes rack up a load of drawings and it may not be the available, due to insufficient profits (ie your salary and dividend hasn’t covered the outs).
Loan Account Overdrawn
If your Directors Loan Account is overdrawn, (which means you owe the company money – you have spent more than your salary and dividends for example) and you haven’t got the ways to reimburse it, ie pay it back to the company by a HMRC set amount of time, you can be hit by HMRC with a tax for an overdrawn Directors Loan Account. This is 32.5%! therefore you could be spending yourself into a huge tax bill. Also, if you have an overdrawn loan account it can also be a benefit in kind unless the business is charging interest on to you. Do not fall into this trap. It’s a really bad habit and it is sometimes hiding another problem within your business – lack of profits, no control on cashflow, no discipline.
I’m a massive fan of planning. Planning before the year end and just planning in general!
If you fail to plan, you pan to fail!
Therefore if you are a client of Together We Count, my team will email you prior to the end of your financial year, so that we can discuss your directors loan account and tackle any issues way before the end of the financial year, when often it is too late to rectify any problems. Meaning we will set a plan in motion for you!
Communication is key
– therefore speak to us to see if you have a good handle on your directors loan account or if you want some accounting and tax advice.
0114 400 0119