What is an Overdrawn Director’s Loan Account?

We’re expert accountants for small business, and have come across many different situations regarding director’s loans. Many people who’ve owned (and are usually a director of)  a limited company will at some point gone overdrawn on their director’s loan account, which means they owed the company money, in short.

This is quite a normal position to be in for many business owners who simply haven’t declared a dividend yet – meaning they’ve not been the official recipient of the company’s profits yet.  A simple paperwork task and some board minutes will correct this overdrawn position and everything will be back “in the black” again.  Most of our limited company clients will have experienced this.

A less common but perfectly normal thing to happen to company owners will be that money is coming in thick and fast to the company, giving the illusion of big profits.  But the complication is that without absolutely perfect accounts on a regular basis, it’s impossible to know whether that money is representative of profits, or just that there are debts building up to others, such as HMRC or a company’s suppliers.

In this situation, it’s easy to accidentally take more money out of the company than it strictly has available to pay.  This creates an overdrawn loan account for the owner – and the owner would need to repay it to the company to avoid any tax issues.

There are some nasty tax complications where a director of a company owes money to the company both in personal tax and through the company’s corporation tax. So we would always advise clients to be as prudent as possible when taking money out of their business. If the bank balance looks too good to be true, it possibly is – and it’s always worth checking!

If you have concerns about directors loans or any tax implications, please contact us.