Director's loan account: does the company owe you?

In short: A director's loan account in credit means the company owes the director; an overdrawn account means the director owes the company. For a shareholder-director, owing the company more than £10,000 at any time in the year normally makes the loan a benefit in kind, and a balance not repaid within 9 months of the end of the Corporation Tax accounting period brings extra Corporation Tax for the company (GOV.UK: Director's loans: if you owe your company money; Corporation Tax Act 2010, section 455).

The direction of the balance matters before you enter it into your accounts: the same-looking bank transfer can be funding, repayment or new borrowing. HMRC requires a record of money paid into or borrowed from the company and the year-end balance in its accounts. HMRC: director's loans.

Start with the transactions, not the sign on a software report. Different screens can display credits and debits differently.

How do you work out a director's loan account balance?

For a simple loan the company owes you, the closing balance is the opening amount owed to you, plus further loans to the company, minus repayments to you. In the example below, £4,000 plus £1,200 minus £2,000 leaves the company owing you £3,200. As a formula:

Opening amount owed to you + additional loans to the company - repayments to you = closing amount owed to you.

This is a reconciliation aid, not a substitute for reviewing other entries.

Illustrative example, assuming genuine loans, no interest and no other movements:

The £2,000 repayment has reduced a debt. It has not created another business expense. Likewise, HMRC says the company does not pay Corporation Tax on money you lend it. HMRC: lending your company money.

Now suppose you take a further £4,000 with no salary, dividend or other documented basis. In this simplified example, the remaining £3,200 credit is exhausted and you owe the company £800. The account has changed direction.

What should you do with unexplained entries?

Explain each one before filing: record its date, amount, bank reference, explanation and supporting document, and keep each director's position identifiable rather than combining unexplained balances into a single figure. A transfer description such as "drawings" does not settle its treatment, so test every uncertain movement against these questions:

• Was it a loan, share subscription, salary, dividend or expense reimbursement?
• Does the evidence support the label used in the bookkeeping?
• Has the transaction already been recorded elsewhere?
• Does the opening balance agree with the prior accounts and loan schedule?
• Can you explain the closing balance without a balancing entry?

An unexplained withdrawal should not be relabelled as a dividend simply to clear the account. A repayment of money genuinely lent to the company is different from a distribution of profits.

Where a director paid a company bill personally, retain the invoice and establish how both the cost and the amount due to the director were recorded. Paying the director back should not create a second copy of the same cost.

What happens if a director's loan account is overdrawn?

Get advice: a shareholder-director's borrowing can require supplementary CT600A reporting and create company or personal tax consequences, depending on the amount, dates and repayment history. Your relationship to the company also matters, and repayment followed by further borrowing can affect the result. HMRC: when you owe your company money.

Keep the transaction history even if the closing balance is zero. Do not assume a repayment resolves every possible tax or reporting issue.

How do you check your software handles the loan?

Check that it calculates the section 455 tax on a loan still outstanding nine months after the year end, and the relief due when that loan is later repaid. Taxley does both in the Director's loans section, for a director's or other participator's loan.

The exception is bed and breakfasting — repaying a loan and borrowing again soon after — which Taxley doesn't work out unless every repayment was made by crediting a dividend, salary or bonus; work out your own figure for that case.

If you're unsure whether a supplementary page applies to your loan position, ask Taxley — but do not send passwords or full tax identifiers in an initial enquiry, and note that product support is not a director-loan tax review. You can also take the 30-second check to see whether Taxley fits your company before you start.

Frequently asked questions

Is money I lend the company sales income?

No. A genuine loan is funding, and HMRC says the company does not pay Corporation Tax on money you lend it. Keep the agreement and transfer evidence so it is not mistaken for a customer receipt (HMRC: lending your company money).

Can I delete an old loan balance if I no longer expect repayment?

Do not simply delete it. A release or write-off is a separate transaction requiring an accounting and tax assessment, and the transaction history should be kept even if the closing balance reaches zero. Get this checked carefully before writing off any director's loan balance.

What does it mean if a director's loan account is in credit?

It means the company owes the director; an overdrawn account means the director owes the company. Check the underlying transactions rather than the sign on a software report, because different screens can display credits and debits differently (HMRC: director's loans).

Is repaying a director's loan a business expense?

No. Repaying money the director genuinely lent reduces a debt; it does not create another business expense. In the worked example, the company's £2,000 repayment cuts the amount it owes the director from £5,200 to £3,200.

Can an overdrawn account be cleared by calling the withdrawal a dividend?

Not simply to clear the account. An unexplained withdrawal should not be relabelled as a dividend, because a dividend is a distribution of profits and needs its own documented basis. Record what each withdrawal actually was, and get advice if the account is overdrawn.

General information for UK company directors, not personalised tax or legal advice. Obtain qualified advice before acting on a loan balance.