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You need to avoid an overdrawn directors Loan Account

We are now almost a year in with Covid-19 which means we are now starting to see the effects within company’s accounts, including reduced profits and, worst case, losses being made.

Extracting funds from a company via dividends is, in most cases, the most tax efficient method and one which our clients take full advantage of.

It’s important to know that for a dividend to be issued there must be sufficient reserves on the balance sheet which are created by profits.

If any loans have been taken out, then this is not available for you to draw down as dividends as it’s not profit.

Another consideration needs to be how to negate an Overdrawn balance on a director’s loan account. This happens when money is extracted from the company which isn’t covered by declared wages and can’t be covered by dividends.

The main reasoning for planning to stop this happening is

(a)    An overdrawn director loan account creates additional tax for the company at a higher rate (although this can be reclaimed once the director’s loan has been repaid)

(b)    if the company is liquidated, the directors may be liable to pay the money back they have drawn

if you have any concerns regarding this or would like to discuss matters further please do not hesitate to contact us.

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MPH Accountants

We offer a friendly and professional service to our clients. Our client base is wide and varied ranging from small one-man bands to large limited companies, and our business principle is the same in that each client, no matter what size, has their own individual requirements.

Whitstable - 01227 277 667
Thanet - 01843 230 256
Email: admin@mphaccountants.co.uk