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Director Loan Account Explained 2020-2021 - YouTube
Channel: Accounting and Tax Academy by Tony D
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what exactly is a direct loan a loan to
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director
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or an overdrawn director loan account
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the terminology can get quite confusing
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with a direct
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loan account so in this video we will
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cover
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what exactly is a director loan account
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and some commonly used terminology
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how much can a director borrow or lend
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between them and their company
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how does the accounting work for a
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direct loan account
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what taxes are potentially payable on a
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direct alone account either through
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borrowing or lending and the recommended
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paperwork for a direct alone account
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before i get into today's video please
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be sure to hit that subscribe button as
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well as the notification bell
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accountants
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[Music]
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according to hmrc a director's loan is
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when you as a director
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get money from your company that is not
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a salary dividend or expense repayment
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or money you've previously paid into or
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loaned the company
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just to add another layer to this
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definition a direct alone account can
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take one or two forms
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that is either money you as a director
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borrow
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from your company and will refer to this
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as an
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overdrawn director loan account or you
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as a director
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lending your company money and will
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refer to this as a loan from director
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since october 2007 there is no limit as
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to how much you can borrow
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or lend to your company through a direct
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loan account however with regards to an
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overdrawn director loan in reality
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you can only really borrow as much as
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your company can reasonably afford to
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lend you
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and has liquid cash to do so it may be
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stating the obvious but if your company
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has say
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20 000 pounds in liquid cash in its bank
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account at a point in time
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then you cannot really borrow any more
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than this at that point in time
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furthermore you need to be careful
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because your company will need a
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proportion of liquid funds for working
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capital
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in other words everyday expenses and
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costs and
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taxes that it is liable for from a tax
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perspective there are two key thresholds
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here
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the overdrawn director loans of up to
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ten thousand pounds and
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overdrawn director loans of more than
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ten thousand pounds
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we'll go into detail on these later in
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this video
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starting with an overdrawn director loan
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account the accounting entries in your
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company would be as follows
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debit direct a loan account in other
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words debtor this means your company is
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owed this money at a point in time so
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it's recognized on the balance sheet
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as an asset and credit bank or cash this
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means the liquid funds
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have left your business bank account and
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have been paid across to you the
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director
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into your personal account when it comes
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to a loan
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from director the entries are literally
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reversed and the director loan account
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becomes a
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creditor account so in other words your
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company has this liability to pay you
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the director
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who becomes a creditor
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the good news is that if you borrow 10
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000 pounds or less
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from your company there is no benefit in
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kind charge
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or interest to pay to your company in
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other words it's an interest-free loan
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with a time limit you will have to repay
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this loan
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nine months after the end of your
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company year otherwise your company will
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be subject to what is known as the
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section 455 tax charge
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at 32.5 of the outstanding loan amount
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so for example if your company year end
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is the 31st of march and you took a 9
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000
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loan on the 6th of january earlier in
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the same year you will have until the
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31st of december in the same year to
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repay the loan
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or your company will be faced with a 2
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925 pounds
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section four five five charge that's
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thirty two and a half percent of the
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nine thousand pounds loan
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a section four five five tax charge is a
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temporary withholding tax
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and the good news is it is refundable
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should the loan be repaid at some point
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in the future
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there is an indefinite time limit to
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repay the loan back providing your
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company remains active and solvent
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and once you do repay the loan your
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company will have four years to reclaim
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the section 455 tax charge
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paid if you borrow an amount in excess
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of 10 000 pounds whether in one go or
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cumulatively
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then the situation changes in order to
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avoid paying a benefit in kind charge
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you will have to pay
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interest at the hmrc official rate click
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on the link in the description below to
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head to hmrc's official interest rates
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so for example you've borrowed twenty
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thousand pounds on the sixth of january
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hmrc's official rate of interest is two
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and a half percent
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so you pay 500 pounds per year in
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interest directly to your company
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this income is subject to corporation
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tax
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if you don't pay interest at the
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official rate or below the official rate
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the benefit in kind charge assuming you
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are a higher rate taxpayer
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will be 200 pounds plus your company
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will have to pay class 1a national
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insurance
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at 13.8 amounting to 69 pounds for the
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year
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and what's more it's strongly advisable
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you draw a formal loan agreement if you
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do opt to pay interest to your company
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as opposed to taking a benefit in kind
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charge personally
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if your company has received a loan from
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you the director then there is no tax
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implication to either yourself
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or your company unless of course you
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decide to charge your company a rate of
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interest on the loan
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which you are well within your rights to
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do so but it must be a commercially
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viable rate quite often an equivalent
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market rate
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for a company loan from a third-party
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lender
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for you personally you will have to
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declare the interest you earn on your
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self-assessment return
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and yes this is taxable on you
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personally for your company the interest
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paid is classified as a business expense
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and gets full corporation tax relief
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with a direct loan account or director
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loans whether it's borrowing or lending
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it is important to get the transactions
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and paperwork right to avoid any issues
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or complications further down the line
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we've put together a free templated
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director loan agreement and some
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guidelines on the paperwork you will
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need for a direct
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loan to get you started click on the
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link below to head to our site and
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download it
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so in part two of our director loan
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account series we're going to address
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the following questions given the
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section 455
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tax charge why would you even want to
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take an overdrawn director loan and
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some of the benefits of doing so what
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are the benefits of
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lending your company money as a loan
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from director
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what if you don't or never repay an
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overdrawn director loan
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and something called bed and
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breakfasting and the anti-avoidance
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measures for when you repay a loan
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to avoid the section 455 tax charge and
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simply borrow the money back again soon
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after
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so click on the bell notification icon
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to make sure you get notified when we
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release this video
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very soon i hope this video has helped
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you understand some of the basics of a
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direct alone account
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in a bit more detail and taking you one
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step closer to knowing your numbers
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as always let me know in the comments
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your thoughts on today's video or if
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there are any topics you'd like us to
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cover in the future
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finally be sure to like and subscribe as
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this really does help us to get our
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content
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out there this is tony d'angel for the
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accounting and tax academy
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thanks for tuning in
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[Music]
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you
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