I took money out of my company. Why is it showing as a Director’s Loan?
It is a question that comes up more often than you might think. You run the business. You own the company. There is money sitting in the company bank account. So surely you can transfer some of it to yourself?
Not quite.
The company’s money is not your money
A limited company is separate from you personally. The money in the company bank account is not automatically your personal money, and when you take it out it has to be accounted for properly.
It might be:
- Salary — processed through payroll
- A dividend — where the company has sufficient distributable profits and it has been properly declared
- Repayment of expenses — where you have personally paid a genuine business cost
- Repayment of money you previously lent the company
If it is none of those, it may end up recorded in your Director’s Loan Account. HMRC describes a director’s loan as money taken from the company that is not salary, a dividend, an expense repayment, or money you previously paid into or lent to the company.
An example
You transfer £10,000 from the company to your personal account.
It has not been processed as salary. It is not a dividend. It is not repayment of expenses. The company did not already owe you the money.
That £10,000 may sit on your Director’s Loan Account as money you owe the company.
Why an overdrawn loan account matters
If your Director’s Loan Account becomes overdrawn, it means you owe money back to the company. Two tax consequences can follow.
Section 455. If you are also a shareholder and the loan is still outstanding more than nine months after the end of the company’s Corporation Tax accounting period, the company may have to pay Corporation Tax at 35.75% of the outstanding loan. That tax can generally be reclaimed after the loan is repaid, subject to HMRC’s timing rules — although any associated interest cannot be reclaimed.
Benefit in kind. If you are a shareholder and director and owe the company more than £10,000 at any point in the year, an interest-free or low-interest loan can create benefit-in-kind consequences.
The real problem is timing
Director’s Loan Accounts should not be something looked at once a year when the accounts are prepared. By then, money may have been going backwards and forwards for months, and the position is fixed — the nine-month clock has already been running.
It is much better to know, during the year:
- How much have you actually taken from the company?
- How has each payment been treated?
- Is your loan account in credit or overdrawn?
- Are there tax consequences building up?
Prevention is straightforward
Most overdrawn loan accounts are not deliberate. They happen when drawings are taken ad hoc through the year and classified afterwards.
Deciding in advance how you will take money out — a regular salary, dividends declared properly when reserves support them — removes most of the problem. That means knowing what the company can actually afford to distribute, which is a question about profit, reserves and what you can take out.
Taking money from your own company is not necessarily a problem. Not knowing how that money has been treated can be.
If you are a director and not sure what your loan account currently looks like, it is worth checking before the year end rather than discovering it when the accounts are prepared. Book a consultation and we can look at it.
This article sets out general information and is not advice for your circumstances. Rates and thresholds change.
