M+A Partners HomeBlogInsight into Directors’ Loan Accounts

One of the main questions we have from clients when they run limited companies is around directors’ loan accounts. How they work and what they are.

To understand directors’ loan accounts, the key thing to remember is a company is its own separate legal entity and any profits generated by the company belong to the company (not the director). Every transaction between a director and the company is between two separate “persons”. This is completely different to a business run as a sole trader.

When money is taken out of a limited company, therefore, it has to be accounted for within the accounts according to what it is. For example:

  • If a salary, it needs to go through the payroll;
  • If a reimbursement for business expenses, the director needs receipts as evidence;
  • If a dividend (where the director is also a shareholder) the relevant legal dividend paperwork needs to be drawn up and signed at the time;
  • It could be rent, if the director owns the trading property; or
  • A loan to and from the limited company (this is the directors’ loan account).

Each type of payment has its own tax consequences.

How a directors’ loan account works

The directors’ loan account keeps a tally of the money a director has lent the company, less monies he/she has taken out (which have not been accounted for elsewhere as salary, dividend, rent etc). This running total starts from the first transaction the director has with the company. If, for example, a dividend or a salary is declared correctly, but not taken out in full by the director, this is also shown as monies lent to the company and added to the directors’ loan account.

If the directors’ loan account goes overdrawn (ie more money is taken out of the company by the director then owed to him/her), this can have tax consequences for the director and the company. Tax advice should be sought asap by the company to minimise the effect of this by careful tax planning.

Therefore, regular conversations with an accountant are vital to ensure there is a plan on how money is taken out of the company by the directors. Key considerations include, making sure it is structured tax efficiently and takes into account the dynamics and wishes of the director group.

If you have any queries and would like to discuss further, do contact your normal M+A Partners contact or Mary-Anne Sargeant on 07917 530018 or email mary-anne.sargeant@mapartners.co.uk.

Written by

Mary-Anne Sargeant
Partner
BIO
Mary-Anne joined M+A Partners in 2003 and was made a Partner in the firm in 2006. Mary-Anne and her team are based in our Attleborough office and provide professional accountancy and tax advice for a wide range of clients, from brand new start-ups to well-established family and owner-managed businesses and from private individuals to sole traders, partnerships and corporate clients.

Mary-Anne is a Chartered Tax Adviser and Chartered Accountant and was placed top in the UK when she undertook her Chartered Institute of Tax exams. She is committed to building lasting relationships with clients, based on gaining a clear understanding of their current and future business needs and taxation issues.

With over 20 years’ experience within the profession, Mary-Anne has the knowledge and experience to provide a portfolio of accountancy and taxation services that support the establishment and ongoing development of a business. Working closely with clients to understand their immediate and long-term requirements, she gives knowledgeable advice that caters to each unique set of circumstances.

Mary-Anne provides guidance on all aspects of accountancy and tax, from deciding on the best business structure; making the move to self-employment; setting up a limited company and guiding clients on both how they work as well as their pitfalls; optimising personal and business tax reliefs; assisting with tax planning for private individuals and companies; to of course dealing with the preparation of accounts, tax returns and VAT returns.
EXPERTISE
  • Accounting Services
  • Business Services and Support
  • Business Startups
  • Corporate Taxation
  • Personal Taxation and Private Client
CONTACT
Mary-Anne Sargeant

Mary-Anne Sargeant has been the Partner of our Attleborough office since 2010. Mary-Anne and her team provide professional accountancy and tax advice for a broad spectrum of clients, from brand new start-ups to well established family and owner managed businesses and from private individuals to companies.

Find out more about our Attleborough office here.