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I Just Don’t Understand!

Where other companies like to blind you with science – we speak in English! Please find below a series of articles that explain some of the more technical aspects of running your business. If you want to suggest a topic for our next article, leave us a message on Facebook.

I Just Don’t Understand! What Is A Director’s Loan Account?

If you are a company director, you can only take money out of your Limited Company at certain times. In order to keep tabs on how much the company owes you, or how much you owe the company, you must keep a list of money in and out called a “Director’s Loan Account”. This is called a loan account even if the company owes you money, and not the other way around.

This is purely a paper exercise – there is not an actual bank account of money. But due to the rules around borrowing money from your Limited company, it is a legal requirement that this record is kept.

So how does it work? Imagine Andy is the only director of Ltd Co X. He would have an I.O.U. (I Owe You) book with X Ltd.

  • Every time Andy buys something for the business out of his money or on his personal credit card, we write in the IOU book that the business owes him that money.
  • Every time he takes money from the business account for his personal use, we write in the IOU book that he owes the business money.
  • If a dividend is issued and the director is a shareholder, he can have the money credited to his Director’s Loan Account, and he can take the money out later.
  • If the director is paid a salary, but does not want to take the money immediately, that can also be added to his account.
  • At the end of the year – there will be a balance in the book – i.e. overall either X Ltd will owe Andy money, or he will owe X Ltd.

This book is the “Director’s Loan Account” – and it is just that – an IOU list totting up whom owes who.

What are the rules concerning Director’s Loan Accounts?

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 The rules regarding these loans are quite complex, but basically you cannot owe the company more than £10,000 during the year without declaring a benefit and having to pay extra tax at the end of the tax year. Also, if you owe the company any money at the end of the financial year, you have to pay it back within 9 months or you will also have to pay extra tax. This is why it is key when running a limited company that you know the balance on this account at all times – to make sure it is within the approved limits – or you could end up paying unnecessary tax!

If you would like any advice about Director’s Loan Accounts or any other aspect of you business, please Contact Us.

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