Director's loan accounts
Use your director’s loan account to record money being loaned to or borrowed from your company.
➡️ What is a director's loan?
➡️ Recording money you’ve loaned to the company
➡️ Recording money you’ve borrowed from the company
➡️ Your director's loan balance
➡️ Non-business expenses
➡️ Tax implications of borrowing money from your company
What is a director's loan?
Imagine it as a virtual pot of money. If a director lends their company money, details of the money loaned is recorded in the loan account. When the money is paid back, the loan account is cleared.
If a director borrows money from a company, that is also recorded in the loan account.
Recording money you’ve loaned to the company
Create new record
Select the transaction type as ‘Transfer’
To/From is 'YOUR NAME’s director loan account'
Select & save
The transaction will now be displayed in your director's loan account. The balance of your loan account will have decreased, as money is owed back to you from the company.
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Recording money you’ve borrowed from the company
Create new record
Transaction type - ‘Transfer’
To/From - YOUR NAME’s director loan account
Select & save
The transaction will now be displayed in your director's loan account. The balance of your loan account will have increased, as money is owed back to your company.
Always be careful when borrowing money from your company as their are tax implications. Learn more
Your director's loan balance
If the balance of your director's loan account is negative, this means the company owes you money.
If your loan account balance is positive, you owe the company money. Be careful as there are tax implications when borrowing money from your company.
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In the above example, as the balance of the account is negative, this means that the company owes Jane £9,700.
Non-business expenses
HMRC rules state that only purchases made "wholly and exclusively for the purpose of business" can be claimed for through your company.
This means that if you make any purchases through your limited company that are for personal use, these must be transferred to your director's loan account and repaid from your personal bank account.
When categorising expenses, if it's for something that is not allowable (like a new passport as shown below) you'll see a red flag and a warning message. These purchases will be automatically transferred to your director's loan account.
When you repay the money into your business bank account, it'll be shown in the importer. You'll need to record it as a transfer to your director's loan account as shown below.
This will then offset the expense in your director's loan account and the balance will be back to net zero.
Tax implications of borrowing money from your company
There are no tax implications of loaning money to your company. However, if you borrow money from your company, there are tax implications.
For income tax purposes, HMRC classifies a director's loan as overdrawn if you borrow money (intentionally or not) from your company and it, at any point in time, exceeds £10,000. If your loan account does become overdrawn by £10,000 it means you will have received a benefit in kind. Benefits in kind are any personal benefits received from your company that are taxable such as a company car, loan, gym membership etc. They must be declared to HMRC using a form known as a P11D and as a result additional income tax will be due plus your company will have to pay Class 1A National Insurance on the value of the benefits.
An added complication with a director's loan is if there is any balance outstanding on the loan when your year end accounts and Corporation Tax return are prepared it must be shown on your Corporation Tax return. Your company must then pay 33.75%.
For example, if you have a loan of £5,000 outstanding when your Corporation Tax return is prepared you will need to pay HMRC £1,687 in additional Corporation Tax. Once the loan is repaid the Corporation Tax on the loan amount can be reclaimed however this can’t be done until nine months after the end of the accounting period in which the loan was paid off.
We recommend your accounts and Corporation Tax returns are filed as soon as possible after your company's financial year ends; however, as the filing deadline is 9 months after your company’s financial year end it is possible to delay filing your return. This would allow you additional time to repay the loan therefore avoiding the additional Corporation Tax.
Should you need a loan, keeping it below £10,000 will avoid additional tax and National Insurance and if possible, repay the loan in full before the end of your company financial year.