At Brophy Accountancy and Advisory Limited trading as BAA Group, we regularly work with company directors who want to understand how Director Loan Accounts work and how to manage them correctly. If you are a business owner or director in Milton Keynes or the surrounding areas, this guide will help you navigate the key rules and tax implications with the help form our Milton Keynes accountants.
As experienced Milton Keynes accountants, we are here to help you avoid unexpected tax bills and stay fully compliant with HMRC.
What Is a Director Loan Account
A Director Loan Account is a record of any money a director takes out of or puts into their limited company that is not salary, dividends or a repayment of expenses. In simple terms, it tracks personal borrowing from or lending to the company by a director.
Many company directors use a Director Loan Account without even realising it. If you take money out of the business for personal use and it is not classed as salary or dividends, then it is likely going through a Director Loan Account.
What Happens When a Director Loan Account Is Overdrawn
Your Director Loan Account is considered overdrawn when you owe money to the company. If the loan is not repaid within nine months of the company year end, the company will face a temporary tax charge.
For clients across Milton Keynes and the UK, BAA Group advises that this tax charge is currently set at 33.75% and is known as the Section 455 tax. While this tax is reclaimable after the loan is repaid, it can restrict your cash flow in the meantime and add unnecessary complexity.
Tax Implications You Should Know About
There are several tax rules around Director Loan Accounts that directors need to be aware of:
Benefit in Kind
If your loan is more than ten thousand pounds at any point in the tax year and you are not paying interest at HMRC’s official rate, the company must report it as a benefit in kind. This means you will pay personal tax and the company must pay Class 1A National Insurance.
Corporation Tax Charge
If an overdrawn loan is not repaid within nine months of the company’s year end, a Section 455 tax charge will apply. This can be a major cost to the business if not managed properly.
Writing Off the Loan
If the company writes off the loan, this is treated as income for the director. You may then need to pay income tax on the amount written off, which could be similar to being taxed on a dividend.
BAA Group’s Best Practice Advice for Directors
At Brophy Accountancy and Advisory Limited, we take a proactive approach to helping directors and small businesses stay financially healthy. Here are some of our top tips for managing Director Loan Accounts effectively:
Keep Good Records
Always record all director withdrawals and repayments accurately. Having clear bookkeeping makes it easier to prepare accurate accounts and tax returns.
Think About Timing
Plan your withdrawals and repayments carefully. If possible, repay any overdrawn amounts before the nine month deadline after your year end to avoid tax charges.
Work With a Trusted Accountant
Having expert advice from a qualified accountant is essential. We work with directors in Milton Keynes and across the UK to ensure Director Loan Accounts are correctly managed and compliant.
Why Choose BAA Group
BAA Group is a trusted team of modern accountants based in Milton Keynes. We specialise in supporting small businesses, limited companies and company directors across a wide range of industries.
As Brophy Accountancy and Advisory Limited, we go beyond traditional accounting to offer real advisory support. Whether you are looking to manage your Director Loan Account, reduce your tax liability or plan for growth, we are here to help.
Get in Touch Today
If you are a company director and want to understand your Director Loan Account or get support from experienced accountants in Milton Keynes, speak to BAA Group today.
Call or email us now for a free initial conversation.
Visit our website at www.baagroup.co.uk
Email Ben@baagroup.co.uk
Brophy Accountancy and Advisory Limited trading as BAA Group
Trusted accountants for Milton Keynes and beyond
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