Director's loan account: record company bank transfers correctly

Money moving between a director and their limited company is not automatically salary, dividend or business expense. Where the transfer does not fit one of those categories, it may belong in the director's loan account and can create tax or legal consequences if the balance becomes overdrawn.

A director's loan is money between the director and company that is not another recognised payment

GOV.UK defines a director's loan as money taken from the company that is not salary, dividend, expense repayment or repayment of money previously paid into or loaned to the company. The company must keep a record of money the director borrows from or pays into the company, usually called the director's loan account.

This is an accounting record, not a separate bank account. The actual money can move through the ordinary company current account, but the bookkeeping must identify whether the company owes the director or the director owes the company. That distinction affects the balance sheet and can create tax consequences.

Record founder or director funding as money owed by the company where appropriate

If a director transfers £30,000 of personal money into the company to cover early payroll or stock, the transfer is not customer revenue. Depending on the legal and accounting basis, it may be credited to the director's loan account so the company records that it owes the director money.

Use a clear bank reference and keep any board or funding documentation. If the director later receives £10,000 back as repayment of that genuine loan, the payment should reduce the balance owed by the company rather than being treated automatically as salary or dividend. The accountant should confirm the proper treatment.

Personal withdrawals and personal expenses paid by the company can increase what the director owes

The Insolvency Service says a director's loan account should show cash withdrawals and personal expenses paid using company money. If the director pays a personal £4,000 expense on the company card and it is not salary, dividend or a valid company expense, the amount can be debited to the director's loan account.

Do not code personal spending as an ordinary business cost merely because the company bank paid it. Keep the personal transaction visible and arrange repayment or another lawful accounting treatment. Repeated unexplained director withdrawals are much harder to correct after year end than when the finance team reviews them monthly.

Salary, declared dividends and genuine expense repayments should not be hidden inside the loan account

GOV.UK specifically excludes salary, dividends and expense repayments from the basic definition of a director's loan. Keep those transactions in their proper categories. Salary should run through payroll where required, dividends need the appropriate company-law and distributable-profit basis, and expense reimbursement should be supported by business evidence.

Do not assume a future dividend can always clear an overdrawn loan account. The Insolvency Service notes that a dividend can only be used where sufficient funds are legally available. If the company lacks distributable reserves, the withdrawal can remain a loan that must be repaid.

Review the director's loan balance before the company accounts are finalised

GOV.UK says the balance must appear in the company's year-end accounts: either the director owes the company or the company owes the director. An overdrawn balance can create tax consequences for both the company and director depending on the amount, timing and circumstances.

Do not wait for the accountant to discover the balance months after year end. Reconcile the loan account monthly and investigate every director-related bank transfer. If the account is overdrawn, discuss repayment, interest and tax with the accountant before filing deadlines determine the available options.

Keep a monthly schedule showing opening balance, money introduced, withdrawals, expense adjustments, repayments, dividends credited and closing balance. This makes the direction of the account obvious. A director who believes the company still owes them £20,000 can otherwise discover at year end that personal spending has already reversed the balance and left them owing the company instead.

Use bank references and approval rules that prevent director transactions becoming invisible

Give director transfers explicit references such as DLA FUNDING, DLA REPAYMENT or EXPENSE REPAYMENT rather than vague labels. Keep personal purchases off company cards where possible. Where several directors are involved, maintain a separate loan-account ledger for each person.

Material director payments should be subject to the same approval discipline as other company payments. The Insolvency Service notes that certain director loans can require shareholder approval. Banking convenience does not override company law. For large or unusual transfers, involve the accountant or legal adviser before the payment is released rather than trying to reclassify it afterwards.