If you’re self-employed you can take business money out of your bank account at any time and use it as your own. The money is yours whether it’s from a separate business account or from a combined business-personal account.
However, if you’re a company director (or other participator of a close company) and take money out of the business over and above any money you’ve put in, and that money is not a salary or a dividend, then the money is not yours – it belongs to the company. You’ve received the benefit of a director’s loan from your ‘director’s loan account’. This loan is sometimes known to HMRC as a ‘loan to participators’.
A director’s loan account can in practice be any form of account or bookkeeping entry – for example a loan account or a current account – or simply the fact that you have taken money out. If your company has other directors who use a directors’ loan account, you must keep separate company records for each loan account your company operates.
As a director of a company, you must manage your director’s loan account carefully, making sure you include all entries accurately and on time. HMRC may make enquiries about your director’s loan account as part of any Corporation Tax compliance check.
You lend money to your company: director’s loan account in credit
If you lend your company money (for example by paying money into your company’s bank account as opposed to, say, buying shares) your director’s loan account is in credit.
You can draw some or all of this money out at any time. There are no tax implications for your Company Tax Return.
Your company lends money to you: director’s loan account in debit or overdrawn
If you take money out of your company’s bank account over and above money you’ve loaned to the company – and that money is not a salary or a dividend – then it’s a loan from the company to you. Your director’s loan account is overdrawn.
HMRC considers any such loan or advance drawn out of the business as a director’s loan whether or not you have set up any type of account in the company’s books.
A director’s loan account can include:
cash payments other than your salary or dividend
expenses that you may have paid for using company funds that are actually for personal use
money withdrawn for your personal use – for example, to renovate your home, pay school fees or personal Income Tax