Last updated: Jan 19, 2024
It's not uncommon for Company Directors to use company funds for personal needs without processing it through payroll, or to inadvertently lose track of their Director's Loan Account balance. However, there are considerable legal and tax consequences from having an overdrawn Loan Account with your company. It is crucial to identify and address a debit Director Loan Account balance as early as possible. Implementing consistent Bookkeeping practices is key to maintaining accurate accounts, enabling management to take appropriate action.
A Director's Loan is a common way for a Company Director to provide funds to their company at the time of start-up or to diversify and expand their business. However, taking a loan from the company can have legal and tax implications. It is essential to exercise caution and seek advice since a company is a separate legal entity.
If a payment is made to a Director and it does not form part of the Director's remuneration package, or is not an allowable expense for the company, the payment must be debited from their Director's Loan Account. If the Director has a credit balance available on their Director's Loan Account, then they can set such a payment against their Loan Account with no tax implications.
Although it should be considered that, once the Director's credit balance is exhausted, any further funds withdrawn from the company will create a Debtor Situation.
For these reasons, professional Bookkeeping services are crucial to adhere to Company Law. Incorpro offers comprehensive Accounting and Bookkeeping services which you may find beneficial for your business.
Additionally, for in-depth insights on the responsibilities and duties of Company Directors, explore our extensive Library, which holds a wealth of information.
Under Section 239 of the Companies Act 2014, companies are generally prohibited from giving loans to their Directors. However, there are exceptions:
There are potential criminal and personal consequences of breaching Section 239 of the Companies Act 2014:
In the field of Company Finance, Director's Loans carry significant tax implications, particularly in terms of Income Tax and Benefit in Kind (BIK), which we will go into more detail below.
For Corporation Tax purposes, any Director's Loan must be declared by the company. The company is required to pay Income Tax at an effective rate of 25% of the loan amount by its Corporation Tax Return deadline. If the loan is repaid by the Director in the following years, then the company can request a refund of the Income Tax paid.
Managing Tax Returns can be complex, which is why Incorpro offers professional services in Tax Returns at competitive prices. Visit our Tax Compliance and Returns Service page for more information.
Company loans made to Directors interest free are liable to Benefit in Kind (BIK) as follows:
The BIK gets put through with the Director's payroll and Income Tax at up to 52% would be payable thereon.
To avoid Director's Loan issues and comply with Revenue and Company Law guidelines, it is safest to only withdraw reimbursable business expenses and net pay from the company. For best practice, reconciling accounts each month to identify any potential liabilities at source is recommended.
Incorpro offers comprehensive Accounting and Bookkeeping services, so that we can take care of these matters for you. This way you can enjoy peace of mind with Accounting and instead, concentrate on your business.
Should you have any queries or require assistance with your Accounting and Tax needs, our dedicated team at Incorpro is here to help. Connect with us by calling 01-4429409, or visit our Contact Page for more ways to get in touch. Stay updated and engaged by following our Social Media Pages on Twitter, Facebook, LinkedIn and Instagram.
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