Director’s loan account is also referred to as director’s current account. This is simply a virtual account in the balance sheet that summarises the transactions between a company director and the company.
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Any expenses paid by the director personally are recorded in this account. For example, if you are claiming mileage and subsistence at HMRC’s scale rates, we would advise you to pay for fuel and subsistence costs personally, then claim the scale rate from the company ie, through directors’ current account.
Likewise, a loan taken or given in the company would also be recorded in the director’s loan account.
Example of a director’s loan
If the director puts £200 into the company account to cover the initial start-up cost this would be considered as a loan given by the director to the company and show as a negative amount (credit) in the accounts. This means the company would owe £200 to the director.
Similarly, if a director buys a laptop work purposes and pays for it personally he would be able to claim the cost of the laptop from the company.
Overdrawn director’s loan
An overdrawn loan usually occurs when the director:
- borrows fund from the company i.e. a loan; or
- has drawn excess funds from the company which cannot be declared as dividends (due to insufficient reserves)
If the loan you have taken from the company is interest free it will be considered as a benefit in kind unless you have paid some interest back to company. The interest rate for 2016/17 is 3% (according to HMRC loan agreement guidelines).
Treatment of S455 tax
You must repay the loan within nine months of the year end date so there is no tax implications. If the loan is not repaid within nine months of the year end, the company will be required to pay S455 tax on the outstanding loan amount.
The rate of S455 tax will depend on when the loan was taken. Any loans taken prior to the 6th April 2016 will be taxed at 25% and 32.5% from 6th April 2016.
You can reclaim S455 tax after the loan has been repaid to the company, however, the interest is non-recoverable.
For more details on directors loan account or about our accounting and taxation services for sole-traders, contractors and small businesses, contact us today.