What is a Director's Loan?

Written by Daily Fix - Published 18-Aug-2022, last updated 19-Mar-2024

A Director's Loan is money you, as a Director, take from your Company's accounts that is not be classed as salary, dividends or legitimate expenses. It is money that you borrow from your Company, and will eventually have to repay.

A Director's Loan account can also be used to record when a Director lends money to the company, for example to help with start-up costs or to see it through cashflow difficulties, or when the Director incurs business-related costs that they pay for personally but want to record these expenses in the Company Accounts for repayment at a later date. This means that the Director becomes one of the company's creditors.

So when can I borrow money from my Company, and why might I want to lend my company money? Both are questions which may arise when you are a Company Director.

In this article we discuss what a Director's Loan is, when it may be used, and some things you need to watch out for.

Why and when might you borrow from your Company?

Why would a Director borrow money from the Business?

Taking out a Director's loan can give you access to money over and above what you are currently receiving via salary and/or dividends. Director's loans are typically used to cover one-off or short-term, such as unexpected bills, personal expenses and strains on your personal finances.

However, care needs to be taken that Director's Loans are recorded properly in the Company accounts otherwise they can be subject to tax penalties or interest payments becoming due. Director's Loans probably shouldn't be used routinely, but rather kept as an emergency source of personal funds.

What is a Director's Loan Account?

The Director's Loan Account (DLA) is where you keep track of the money you either borrow from your Company, or lend to it. Typically this will have its own Nominal Account in your accounts package which will appear on the Balance Sheet.

If the Company is borrowing more money from its Director(s) than it is lending to it, then the Director's Loan Account is in credit with the Directors becoming creditors.

If the director(s) borrow more, then the DLA is said to be overdrawn and the Directors become debtors of the Company.

Bear in mind that shareholders (and maybe other creditors) may become concerned if your Director's Loan Account is overdrawn for any length of time.

Your Accountant will be able to help you understand how a Director's Loan Account should be used and what, if any, tax implications this has on your and your business so you should ask to speak with them abount Director's Loan Accounts.

Is interest payabe on a Director's Loan?

Put simply, It is up to your company what interest rate it charges on a director?s loan.

However, if the interest charged is below the "official rate" then the discount granted to the Director may be treated as a ?benefit in kind? (BIK) by HMRC, resulting in you as director may being taxed on the difference between the official rate and the rate you?re actually paying.

There can also be other tax implications including National Insurance libalities. You should speak with your Accountant about this as the individual circumstances need to be taken into consideration.

How much can I borrow in a Director's Loan?

While there is no legal limit in the size of a Director's Loan, you should should consider very carefully how much the Company can afford to lend you, and how long it can manage without this money otherwise cashflow problems for y our Company may result.

Also, loans above a certain amount will automatically be treated as a benefit in kiind resulting in a Class 1 National Insurance payment being due, and must be reported on your personal self-assessment tax return.

Again, seek advice from your Accountant.

When must I repay a Director's Loan?

A Director's Loan must be repaid within nine months and one day of the Company's financial year end date, or you will have to pay Corporation Tax at 32.5% of the outstanding amount, plus interest.

You can reclaim the Corporation Tax - but not interest, once the loan is fully repaid.

Can I repay a Director's Loan and immediately take out another one?

The 30-day rule

You must wait a minimum of 30 days between repaying one loan and taking out another to avoid tax charges being imposed.

You may be tempted to try to avoid tax penalties of late repayment by paying off one Director's Loan just before the nine-month deadline, only to take out a new one. But this could be seen as an avoidance tactic and you don't want to be investigated for tax avoidance!

'Accidental' Director's Loans

What is an accidental Director's Loan you may be wondering...

Well, if you inadvertently, by pay yourself an illegal dividend then this may need to be recorded in the Company Accounts as a Director's Loan.

What is an 'illegal dividend'?

Dividends can only be paid out of current profits or retained earnings, so if your business has not made a profit or has enough retained earnings then a dividend payment would be illegal.

In such circumstances the illegal dividend should then be considered to be a Director?s Loan, and recorded as such in the Director's Loan Account.

Can I lend money to my Company?

So far, this article has covered the taking of Company funds as a Director's Loan, but it's also possible to make a Director?s Loan the other way round, by lending money to your Company.

Why would I lend my Company money?

If your Company is having short-term cashflow issues, or you have paid for some Company Expenses from your personal funds but you don't want the Company to repay you for these expenses immediately then you can record the amounts in the Director's Loan Account. You may also want your Company to invest in a new piece of machinery but there's not enough cash in the business to pay for this. Again, this needs to be recorded in the Director's Loan Account to show you as a Creditor.

The Company can pay you interest on the money you have lent to it and this interest can be treated as a business expense. Interest paid to you is considered personal income and must be recorded on your self-assessment tax return.

Director's Loan Checklist

Here are a few things to remember when you are considering borrowing money from your Business (becoming a Company Debtor), or lending money to your Company (becoming a Creditor).

Explore other options when considering lending money to, or borrowing money from your Company. Is there a better way to proceed?
Aim to borrow less than £10,000 - and if you do borrow more than £10,000 then you must report it on your self-assessment tax return and the Company must treat it as a Benefit in Kind (BIK).
Try to pepay your Director's Loan within nine months and one day of the company year-end, otherwise there will be tax implications.
Do not be tempted to try to pay off one Director's Loan with another Director's Loan. Wait at least 30 days between taking out different Director?s loans.
Keep detailed financial records of the Director's Loan and repayments so that both you and your Company adhere to tax rules.
Be completely certain that your Company has made enough profit, or has enough retained profit, before declaring dividends to avoid "accidental director's loans".
Seek advide from your Accountant.

Conclusion

As you can see, Director's Loans are a useful for both the Company and yourself. But careful consideration should be given to each incident.

Through records need to be kept when dealing with Director's Loan to ensure they are legal and that any tax issues are dealt with correctly.