When you are ready to repay a loan there are a number of ways this can be done. The simplest way is often to vote a dividend and use it to reduce the balance of the loan.
A Director’s Loan account is a record of money that a director has borrowed or loaned to the company. The loan can have tax implications therefore it is important to understand these whilst a loan is in place.
Repaying a loan using dividends
The simplest way to reduce a directors loan is to vote a dividend but instead of paying the dividend to the shareholder, use it to reduce the loan account. This saves having to transfer cash out of the business account for the dividend and back in to pay off the loan.
Firstly vote the dividend as normal for the amount you require. Once done you’ll have a pending payment for the dividend in your bookkeeping screen.
Then to use this to reduce a loan:
- In your bookkeeping screen, select the director’s loan account
- Click on the pending payment for the dividend to mark it as paid
- Enter the transaction date and click the match checkbox, then save
This will reduce your directors loan by the amount you matched within that pending payment.
Repaying a loan using expenses or salary
It is possible to use other money owed to a director to reduce a loan. For example, if a payslip has been generated that has salary and expense reimbursements to the director, instead of paying this into the directors personal account it can instead be used to pay off a loan.
When you have a pending payment for an amount that is due to be paid to the director in the bookkeeping screen, e.g. a payslip or some expenses, to reduce a loan:
- In your bookkeeping screen, select the director’s loan account
- Click the icon to the right of the pending payment that is due to the director to mark it as paid
- Enter the transaction date and click the match checkbox, then save
This will reduce your directors loan by the amount you matched within that pending payment.
Repaying a loan using cash
If you are repaying cash back into your business to reduce or clear a loan, once you have transferred the funds to your business bank accounts you will need to credit your directors loan account to reduce it’s balance.
To credit your director’s loan account:
- In your bookkeeping screen, select the director’s loan account
- Click [Enter Company Transaction] > [Transfer to another account]
- Enter the date, description, amount, and select transfer to Business Bank Account. If for example you are repaying your company the £5,000 loan, enter it as a positive amount
- Check the match box and then press Save
The balance of your director’s loan account will be updated and in the example below where the full amount of the loan is being repaid, the balance of the director’s loan is now zero.
Then update your business bank account:
Whilst still in the bookkeeping screen, change your account to your Business Account so you can see your bank transactions.
You’ll see a transaction has been created automatically for the director’s loan, in the example below, £5,000 credit. This transaction awaits confirmation (reconciliation) that you have paid the money into your business account.
Simply click to edit the transaction and check the box to match the details (date and amount) in inniAccounts to match exactly those shown on your business bank statement.
You have now successfully recorded the repayment of your loan to the company and updated your director’s loan account.
To check that this has worked as expected, your LiveCash will have been updated with the new balance of the director’s loan.
A director puts in some money into the company so as to open a company’s bank account. how does the company repay the director.
Thank you
The company can make a payment from the business bank account directly to the director for what they are owed as long as there are funds available in the bank. The accounting entries would be DR Director’s Loan Account CR Bank.
If you take a minimal tax allowance salary, and receive wage slips for these, And end up having an overdrawn directors loan account balance of less than 10k, can you declare this as an additional salary rather than issue a dividend to pay it back.
The reason being, most of salary and profit want to be shown on self assessment for mortgage income purposes.
Should a dividend be issued, then this is deducted from profits.
Do you pay tax on the dividend that is declared to repay the directors loan, I’m aware you pay take on dividends declared to shareholders
If I pay
Generally speaking it is tax efficient to take a small salary and top up your remuneration with dividends as these are not subject to national insurance and are taxed at 7.5% within the basic rate tax band whereas salary would be taxed at 20%.
If you are operating a limited company then your company profits will not be shown on your self-assessment tax return as this is a separate legal entity to you.
Your tax return will however show your salary and dividends taken from your limited company, that would form part of your overall remuneration considered for the purposes of mortgage applications.
You will pay tax on any dividend declared after the tax free amount which for 2017/18 is £5,000. This will be based on the tax band the income resides.
If you fail to repay a directors loan account within 9 months of the end of the accounting period the loan was taken out then your limited company would be subject to a tax charge of 32.5% of the amount loaned.
Hi, can a Company contra the loan from Director with the property named under the Company?
Hi June,
The loan from the director will be treated as a liability in the company’s accounts and the value of the property will be treated as an asset and these should not be offset against one another.
The accounting for property company’s can be complex so you may want to seek specialist advice.
when the director gives loan to company, can that be offset against dividends? or company has to repay that separately?
Hi Bilal
When a director makes a loan to a company this can be repaid back to the director tax-free and does not need to be processed as dividends.
How is the re-payment of a loan from the company to the director reported to revenue canada?
Hi Ken,
The re-payment of a loan from your limited company isn’t taxable in the UK however you would need to seek advice of someone who specialises in Canadian taxes to confirm whether the same applies in Canada.
I am about to buy a shop for my business and have some money in my limited company. I wonder if I can loan myself (as director) this money and pay back to the company with an interest similar to the interest we pay for mortgages? let say can I borrow from the company and pay back in 10 years with some interest every month?
Hi James,
As a director of your limited company any loans that you take will be classed as director loans and will need to be repaid within 9 months of your company’s financial year-end to avoid an additional Corporation Tax charge at 32.5%. If you do not repay the loan and instead, pay the Corporation Tax charge the company will get this money back from HMRC 9 months after the financial year in which the loan has been repaid. The company can charge interest on any loans it makes to you as a director however this should be at a commercial rate i.e. what can be obtained on the current market. Any favourable interest rate loans will need to be reported as a benefit in kind from your limited company.