The director’s loan account in FreeAgent
This article explains what the director’s loan account is and how it works in FreeAgent.
Please note that this article only applies to limited companies.
The director’s loan account
The director’s loan account is money that a limited company owes to, or is owed by, one of its directors.
If the company owes money to the director, the director’s loan account will have a credit balance because it’s a liability of the company as it’s money that the company is due to pay.
If the company is owed money by the director, the director’s loan account will have a debit balance because it’s an asset of the company as it’s money that the company is due to receive.
Record interest paid on a director's loan
As a company director, you may charge your company interest on the loan which counts as both:
- a business expense for your company
- personal income for you
Therefore, you’ll need to tell HMRC about the interest payment you receive by reporting it as income on your Self Assessment tax return. Your company must deduct Income Tax on these payments and then report that to HMRC using a CT61 form, which you'll need to request from HMRC.
You can explain the payment related to the interest as 'Payment' > 'Interest Payable'. However, we'd recommend checking with your accountant or bookkeeper that they're happy for you to record it in this way.
How the director’s loan account works in FreeAgent
Balances can be posted to the director’s loan account by explaining bank transactions, adding out-of-pocket expenses and creating journal entries.
At the company’s year end date, FreeAgent adds together the balances of the following accounts:
- ‘900 - Smart User Payments’
- ‘902 - Net Salary and Bonuses’ (wages that the company pays the director for their work)
- ‘904 - Benefits in Kind’ (costs that the director has chosen to add to the director’s loan account instead of posting to the profit and loss account)
- ‘905 - Expense Account’ (out-of-pocket expenses the director has incurred and any expense repayments)
- ‘907 - Director Loan Account’
Please note that the share capital account (code 901 in FreeAgent) doesn’t form part of the director’s loan account because that is money that the company owes to the individual in their capacity as a shareholder, rather than as a director. This applies even if the shareholder and director are the same individual.
Debit director’s loan account balances
If these accounts add up to a debit (i.e. overdrawn) balance, the director’s loan account is overdrawn and this indicates that the participator owes the company money. A 'participator' is “a person having a share or interest in the capital or income of the company” and could include any loan creditor of the company. For most small limited companies, its participators will be its shareholders, who will often also be directors. If the company has issued debt finance called debentures, then the holders of the debentures may also be participators.
If you owe money to the company, you’ll almost certainly need to complete the CT600A form along with your company’s Corporation Tax return (CT600). You’ll also need to disclose details of the loan on your Final Accounts report. You can find out more about your Corporation Tax responsibilities if a director, or other participator, owes money at the company’s year end on the government’s website.
If the debit balance goes over £10,000, the loan counts as a taxable benefit.
If any value of the loan is not repaid within nine months of the year end, your company will need to pay Corporation Tax on any outstanding loan to a participator. This is called S455 tax.
Should the loan be ‘written off’ and you're looking to move the balance of the director’s loan account to another category, you can do that by creating a journal entry.
Credit director’s loan account balances
If these accounts add up to a credit balance, this indicates that the company owes the participator money. Credit balances typically don’t need to be reported on form CT600A.
If you’re unsure whether you need to report a director’s loan account balance or how to 'write it off', please ask your accountant.