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You need to avoid an overdrawn directors Loan Account

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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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