What is the Director's Loan Account?
By Cheaper Accountant, Sep 17 2015 09:51AM
A director’s loan account arises from cash injected into a limited company by a company director or when a director extracts cash from a limited company that is neither of the following:
1. Salary payment
2. Dividend payment
3. Repayment of expenses
4. Money previously paid into the company
A positive balance on the director’s loan accountant means that cash is owed to the director by the company. This cash can be extracted by the director at any time without incurring a tax charge (income tax or corporation tax).
An overdrawn balance on the director’s loan account means that cash is owed to the limited company by the director. This can result in a tax charge and should be avoided. The tax charge may be as follows:
1. 25% of the original loan to the director as corporation tax
2. Class 1 national insurance contributions
3. Income tax on a ‘benefit in kind’
It is sensible to avoid an overdrawn position due to the tax ramifications associated with this. Speak to one of our Cheaper Accountants for further advice.