Posted: 2. October 2019 by: Rupert Tennant

What Are Director’s Loan Accounts?

What are Director Loan accounts?

sesauer October 2, 2019

When you start an LLC, there are many different rules and regulations you’ll need to follow and first and foremost figure out. One of these is the rules about the director loan accounts. It’s not something those who aren’t in finances like to learn about, but you’ll need to discuss the matter with the lawyer and an accountant.

This article will detail what these accounts are, the rules regarding how you can use them, and how they will affect your bottom line.

What are they?

The money held in the LLC account doesn’t belong to the director of the company. It belongs to the company itself as a separate entity from the director as a person. This presents a problem in case the director needs some of it to use right away. That’s what the director loan accounts are for to extract the funds from the company.

  •  That’s pretty much all the money you take out the company that excludes a few ordinary expenses such as:
    Salaries, dividends, and expense repayments
  • The money you’ve previously paid to the company, and that’s now been repaid.

What could the account contain?

There are a few items you’ll need to log through your director’s loan account. Others can be, but there are also other ways to extract this money, and you don’t need to move it through the account. The necessary ones are:

  • Cash withdrawals that you made as a director
  • Personal expenses paid by the company

Business expenses are the ones that have been made wholly and entirely during the operations of the business and for that purpose. Personal expenses are the ones made for something that’s not related with the work of the company.

Who can take it?

The loan can be taken from the company funds only by the director. That’s why it’s called a director loan. The board of the shareholders appoints the directors. The director could be paid with a salary like any other employee or paid via the dividends paid from their shares.

How the director can take a loan, how much of it, and how often is also decided by the board and the rules set this way need to be followed by the director when taking out a loan.

Taxes

The money that you’ve taken out of the company funds and used is, in a way an income and that means that you have tax obligations in relation to it. This is something that a director needs to be advised on both by the company accountant and by their personal tax advisor.

The tax is paid only if you don’t repay it, meaning that it’s your personal income that you’ve kept. The tax on it is set rather high; the rate is 32.5 percent on the money you’ve kept. It’s paid yearly.

Written off loans

The company can write off the loan that you have taken from it as a director. That happens when you can’t repay the loan or decide to use this method to reward a director; they feel deserves it. However, when there’s no more loan to give back the tax obligations stay.

The money stays with the director that has taken out a loan meaning that it’s their income and they need to be taxed on it even though the company has decided to treat this funds as a gift to the director. The rate depends on the amount.

HMRC

HMRC has the role of monitoring director’s loans. They need to know when the loans are issued, they repaid and in the end, how much tax do the directors and the company need to pay on these. They also need to make sure that a loan actually is a loan, meaning the money you pay back to the company over time.

There are some who try to hide ordinary income paid towards their directors as a loan and thus pay less tax on it. This isn’t something you should try since there are quite harsh penalties from HMRC for doing so.

Conclusion

Director loans are the loans that the director takes out from the company funds and repay. These aren’t salaries and are funds that are needed actually to run the company expenses on day to day basis. They are a loan that only one person can take out for their personal needs.

The rate that you’ll need to pay is set at 35.5 percent. That’s what you’ll have to pay on this income if you don’t repay the loan. This is also the case when the company writes off the loan over time and leave the funds to the director.