Directors Current Account- This is often something we receive many questions on so thought it would be best to offer a bit more detail within a post.
Lets start with the basics.
What is a Directors Current Account?
A directors current account (sometimes known as a directors loan account) is a somewhat fictional balance between the companies and it’s directors. Its not areal, physical bank accounts and it doesn’t real represent real monies owed or due. It essentially record transactions between the 2 parties. These transactions include but are not limited to dividends, salaries, expenses and any loan to the company from the directors. It cal also record loans to the directors but more on that a little later. It is also worth noting that the directors current accounts should be kept in credit i.e. the amount owed to the director by the company.
But let’s not forget, Dividends can not exceed retained earnings, which may cause a problem if the directors current accounts is higher than retained earnings as this could leave the account overdrawn. This would be highlighted by a debtor in the accounts i.e. the director owes the company money, which has 3 implications.
Firstly, it’s illegal under the Companies act. Although this is only a problem if the company becomes insolvent as with most small businesses the shareholders and directors are the same people.
Secondly, an overdrawn Directors Current Account is subject to S455, a 25% Corporation Tax surcharge. Which is an odd little tax (like many others) as it is only a temporary charge, and is repaid once the liability is settled. Think of it as a HMRC insurance premium.
And last but not least, a Directors Loan is subject to benefit in kind charge.which could be up to 45% plus 13.8% employers National Insurance.
If you do have any questions please get in touch with us.