Director’s loan accounts explained: overdrawn, in credit and the tax rules

A director’s loan account is the record of money you take from, or pay into, your company that is not salary, a dividend, an expense repayment or money you previously paid in. GOV.UK says you must keep this record, and it is usually known as a director’s loan account.

A director’s loan can also involve close family members getting money from the company. At the end of the company’s financial year, include any money you owe the company or it owes you in the balance sheet in your annual accounts.

An overdrawn account means you owe the company money, and an account in credit means the company owes you. Your personal and company tax responsibilities depend on which it is.

You may move between the two over the year. Dividends and salary change the balance too, which is why the account needs updating whenever money moves.

If you are a shareholder as well as a director and the loan is not repaid within nine months of the end of the company’s Corporation Tax accounting period, the company must pay Corporation Tax on the outstanding amount. Interest is added on that tax until it is paid or the loan is repaid.

The company reports the loan on form CT600A with its Company Tax Return. GOV.UK’s director’s loans page states the rate as 33.75% of the outstanding amount, or 32.5% if the loan was made before 6 April 2022.

The charge is a Corporation Tax liability of the company, not a personal tax. It is also not a penalty: it can be reclaimed, as the next section explains.

Yes. The company can reclaim the Corporation Tax it paid on a director’s loan once the loan has been repaid, written off or released, but it cannot reclaim the interest.

• The relief is due 9 months and 1 day after the end of the accounting period in which the loan was repaid, written off or released, and you will not be repaid before then.
• Claim within 4 years (6 years if the loan was repaid on or before 31 March 2010).
• If you are within 2 years of the end of the accounting period the loan was taken out, you can claim on form CT600A in the Company Tax Return, or amend it online.
• After 2 years, use form L2P.

GOV.UK also sets a rule against repaying and re-borrowing: if a loan over £5,000 is followed by another loan of £5,000 or more within 30 days of the repayment, the company pays tax on the original loan. A larger threshold of £15,000 applies where another loan is arranged when the repayment is made.

If you are a shareholder and director and owe the company more than £10,000 at any time in the year, GOV.UK says the company must treat the loan as a benefit in kind and deduct Class 1 National Insurance. You must report it on a personal Self Assessment return and may pay tax at the official rate of interest.

If you pay interest at less than the official rate, the company must record the interest you pay as company income and treat the difference as a benefit in kind. You then report that on your own return and may pay tax on the difference between the official rate and the rate you paid.

Keep it as a running ledger that records every payment between you and the company, with the date, the amount and what it was for. GOV.UK only requires that you keep a record of money you borrow from or pay into the company, but a dated ledger is the simplest way to show what was salary, what was a dividend and what was a loan.

• Record each withdrawal and each repayment on the day it happens.
• Check the balance before the end of the company’s accounting period, so you know whether it is overdrawn and by how much.
• Show the closing balance on the balance sheet in the annual accounts.
• If the account is overdrawn, diary the date nine months after the accounting period ends.

If you are unsure how a payment should be classed, ask your accountant before the year end, not after.

If a loan is written off or released instead of repaid, including where the company goes into liquidation, the company must deduct Class 1 National Insurance through payroll and you pay Income Tax on the loan through a Self Assessment return.

So writing a loan off is not a way to avoid tax; it changes which tax applies. If the company is struggling, take advice early. For a company in difficulty, a licensed insolvency practitioner can explain what a director’s loan means in an insolvency.

Your company does not pay Corporation Tax on money you lend it. If you charge interest, it counts as a business expense for the company and as personal income for you, which you report on a personal Self Assessment return.

The company must pay you the interest less Income Tax at the basic rate of 20%, and report and pay that tax every quarter using form CT61. Keep a clear record, because the balance in your favour is what lets you take money back out later without it being treated as a loan from the company.

It can, because it shows on the balance sheet that lenders read. An overdrawn account is money owed to the company, and an account in credit is money the company owes you. Each lender sets its own criteria.

Lenders may also ask directors for a personal guarantee, which is a separate commitment. A tidy, up-to-date account makes your accounts easier to explain, as does knowing your balance sheet. For how other money leaves the company, see how to pay yourself from a limited company.

Capzy is a credit broker, not a lender, and is paid by the lender. We cannot advise on director’s loans or tax. What we can do is help when the company needs business finance.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. See also our business finance guides.