Discover the hidden pressures on directors loan accounts....
Firstly, this is written with directors and shareholders of companies in mind. If you’re still operating from a partnership, then you seriously need to look into why you are probably paying more tax that you need to! Because companies are generally more flexible and more tax efficient for most profitable businesses than a partnership (especially with corporation tax rates falling to 17% by 2020). But there’s one area where you can easily start to pay more tax than you really need to without realising.
The story of low and declining directors’ loan accounts (DLAs)…
Normally (and this is subject to the personal circumstances of the director), the most tax efficient way of remunerating a director / shareholder involves a mixture of salary, interest on loan accounts and dividends. This is an extremely tax efficient way to run your business and minimises personal tax and national insurance liabilities.
In most cases directors take monthly drawings from their directors’ loan account, which are then topped up once a year by declaring dividends.
But the problem comes when your drawings get bigger. A new car; private motor expenses; school fees; a house extension or extra private mortgage repayments all start to hit the directors’ loan account, and before you know where you are your annual drawings are higher than the tax efficient level of dividends declared each year.
The unfortunate part is that declaring extra dividends to cover these extras going through your loan account costs 32.5% in extra tax for the director, and potentially even more than this if your loan account goes overdrawn.
The hidden pressure
There’s two key areas that we see adding particular extra pressure on director’s loan accounts in many cases:
A typical family of 3 children could be paying around £6,000 per annum in school fees out of their DLA. When you take into account that fact that it actually costs 32.5% tax in extra dividends to cover this, it’s actually costing £8,889 per annum to send the kids to school… (so you could be paying an extra £31k of tax over the whole time they are at school!)
Giving to welfare situations
We also find that gifts to welfare cases put extra pressure on directors’ loan accounts, eroding them further.
How to save all that tax
We’ve got an interesting solution to all this, which we launched back in 2017 called a Welfare Trust, which is a unique way of solving this problem, and achieving significant tax savings.
If you would like a consultation to explain how you can pay school fees and give to welfare cases without paying any extra tax, then click here to contact us for a free advisory session
Please note This report is provided for information only. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this report can be accepted.