LJS Accounting Services

What Is A Directors Loan and How Do They Work?

Directors Loan Account

Director’s loans are loans given to directors (or shareholders) from the company – whether it be for business or personal purposes.

Some directors may take out a director’s loan to cover short-term housing repairs, for example. Directors can also lend money to the company when needed.

Learn more about director’s loans, how director’s loans work, and the benefits of a director’s loan here.

 

How Do Director’s Loans Work?

There are two types of director’s loans:

  • Director borrowing funds from the company (for reasons other than salary)
  • Director lending funds to the company (investing, often for start-up costs)

 

When a director borrows money from the company, the loan will be recorded as a debt. Although there’s no legal limit on how much a director can borrow, directors should always consider the financial health of the company. Bear in mind that loans of more than £10,000 are classed as a benefit – and must be reported to HMRC.

 

What Are Director’s Loan Accounts?

A director’s loan account is a record of all financial transactions between a company and its directors. It acts as a register, keeping track of the money that flows in and out of this financial relationship.

This account can contain loans given by the director to the company or vice versa, as well as other financial transactions such as expenses, salaries, or dividends.

Director’s loan accounts ensure transparency and accountability. They help differentiate between the personal finances of a director and the finances of the company.

Firstly, directors can lend money to their company for various reasons, such as supporting the business during a financial crisis or financing specific projects.

When a director extends a loan to the company, it is recorded as a credit in their DLA. This shows the amount the company owes to the director.

Directors might borrow money from the company for personal reasons. These personal withdrawals are recorded as a debit in the DLA, indicating the amount the director owes to the company.

 

Benefits of Director’s Loans

  • They Work Both Ways – You can also put your own funds into the business, as well as take money out of the company. This means you won’t have to work with other lenders and apply for loans, saving you time and money.

 

  • They’re Cost-effective – Directors loans can be cheaper than other forms of financing. The current interest rate for director’s loans is 2.25%, despite the Bank of England’s base rate being 5.25%. Some companies, however, may decide against charging interest in the form of a ‘beneficial loan’.

 

  • You Can Access Funds Quickly – Finally, director’s loans give quick and easy access to funds. This is ideal in emergency situations – for example, to pay for healthcare or to deal with an unexpected bill. There are no lengthy applications to deal with, and the process is relatively hassle-free.

 

Can All Directors Take Out a Director’s Loan?

In short, no – not all directors can take out a loan from the business. In most cases, these loans are only available to those who have a large stake in the business. So, if you hold a large stake in your business, then chances are, you can take out a director’s loan.

 

Tax Implications of Director’s Loans

If you’ve taken out a director’s loan, you must repay the funds within 9 months of the end of the company’s financial year if you want to avoid additional tax charges.

If you don’t repay the loan in full by this time, the company could be subject to a 32.5% Corporation Tax charge on the amount of the loan.

If the loan is £10,000 or more, this will be treated as benefit in kind – and therefore, you will need to report this to HMRC and report it on your director’s self-assessment tax return.

At LJS Accounting Services, we can help you deal with all the tax implications of director’s loans. Get a quote today.

Have You Got Any Questions?

Need to talk to someone? Get in touch with one of our consultants today and we will be happy to help.
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