What an insolvency practitioner is going to check if you close your company

Is your director’s loan overdrawn?

This issue is a ticking time bomb.

Lots of business owners in the UK take a small amount of salary (about £8/9k) through the PAYE scheme and they top their income up by dividends. This is a perfectly acceptable way to take your income when your business is making a profit.

But, if you don’t make a profit, this method can cause you huge problems.

Many UK businesses didn’t make any money last year yet the director continued to pay themselves a dividend.

If this sounds like you, be aware that you have taken a loan from the company and if the company is liquidated, you will be asked to pay it back.

If your company has no reserves you can’t pay dividends and if you’re not making any money you need to stop taking money like this NOW!!

For example:

John pays himself £8000 a year through the PAYE scheme and he takes another £500 a week from the company that he classes as a ‘dividend’.

What John doesn’t realize is that dividends are declared annually when the accounts are done out of the companies profits. This dividend cancels out the money that John has taken.

If John’s company hasn’t made a profit this year then he is not able to declare a dividend at the end of the year and the £25,000 he has taken will be classed as a loan.

That £25,000 is now an overdrawn director’s loan and if the company goes into liquidation the insolvency practitioner is going to ask John to pay it back.

If John doesn’t pay it back he could be forced into bankruptcy.

1st Business Rescue is here to help you understand you and your companies options upfront in an easy-to-understand manner.

There are lots of business owners out there who will close their ltd companies this year, if you are one of them it’s critical you understand if you have a director’s loan and what you can do about it.

The key to dealing with an overdrawn director’s loan account is to be proactive and not put off having the conversation:

In my experience, the earlier you seek advice the more options that you have available.

You can contact myself for a confidential chat about your situation at any time.

All the best,
Chris

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