Fact sheet: Director's loan accounts
Published 31 March 2022
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A director’s loan is when you take money from your company that is not:
- a salary, dividend or expense repayment
- money you’ve previously paid into or loaned the company
The law states you must keep a record of any money you borrow from, or pay into, the company - this record is usually known as a director’s loan account.
For more information on understanding your duties as a director, read our Company health check - keeping your business on track guidance
As a company director you must have your own loan account which should show:
- all cash withdrawals made from the company
- all personal expenses paid with the company’s money
A personal expense is any expense that is not incurred wholly and exclusively for the purpose of the business. Any company money used by you on a personal expense must be recorded and paid back.
Read more on Director’s loans: If you owe your company money
1. Company accounts
The company’s accounts should also show all money withdrawn from the company and all money paid back.
At the end of your company’s financial year, you’ll either owe money to the company, which will be shown as an asset in the balance sheet, or the company will owe you money and will be shown as a liability.
2. Director’s loans must be repaid
The money you borrow still belongs to the company and has to be paid back, even following insolvency.
It may be possible for a Director’s Loan Account to be offset, if you are a shareholder, by declaring a dividend at the company’s year-end, if sufficient funds are available, but otherwise the loan remains repayable.
If the directors of a company are not also the shareholders, separate shareholder approval is required before a director’s loan of £10,000 or more can be made. Without such consent, taking the directors loan could be considered as misfeasance or even theft.
There can be tax implications depending how much is borrowed, and over what time period. Good record keeping is essential to ensure the correct taxes are paid.
3. Paying the interest
If due, you need to pay the correct amount of interest on your loan from the company and if you charge interest on a loan you make to your company, you need to declare the interest as part of your income.
4. If your company is liquidated
If your company is subject to any liquidation proceedings, a Liquidator can take legal action against you to collect any money you owe to the company, in order to repay the company’s creditors. If you cannot afford to repay this money you may be at risk of bankruptcy.
5. Case study 1
Despite being aware of an ongoing investigation by the tax office into their company, a father and son sold the company’s only assets for £150,000 and used the proceeds to reduce the amounts repayable by them in relation to their own director’s loan accounts. This left the money unavailable for any potential claim against their company by HMRC or any other creditors.
Additionally, after the directors knew their company was insolvent and had stopped trading, they collected commission of more than £1.6m, of which £1.3m was used to further reduce their director’s loan accounts, instead of repaying the company’s debts.
Once a company is insolvent, the directors’ duties become due to the company’s creditors instead of its shareholders, and so the directors had a duty to repay creditors ahead of themselves. The directors were therefore each banned from acting as a director of a limited company for 6 years.
6. Case study 2
Seven associated mini-bond selling companies responsible for the mis-selling of over £20m of loan notes also took £2m from investors after the companies were insolvent.
The marketing of high-risk mini-bonds, used to fund property development projects, was misleading and the directors are believed to have been the beneficiaries of £2.5m through director loan accounts.
Following an investigation by the Insolvency Service, the Court wound up the group of companies in the public interest, and the Official Receiver was appointed as Liquidator.