If you have spent your bounce back loan personally watch this.
Most directors that I speak to take their income from their company via a small amount of salary and the rest they top up with dividends.
It’s important to remember then when you have a ltd company; the cash in the business is the business and not yours personally. Sounds simple, doesn’t it? But it catches lots of directors out when they take too much money out of the company and end up with an overdrawn directors loan account.
A problem I see day in day out is when a director has used their bounce-back loan to live on, this is potentially going to cause them a problem if they end up needing to liquidate their company.
It’s important to remember that you can only take a dividend when the company makes a profit.
Many businesses have taken a drastic cut in income since the pandemic but haven’t changed how they have paid themselves. Here lies the problem.
John takes £8,840 a year as salary, this is classed as the optimum salary and is the most tax efficient way for most directors to pay themselves. He tops his wages up every month to £4,000 and has done so for years, at the end of the year he gives the Accountants his books, the Accountant declares a dividend out of profits, John gets a corporation tax bill and pays it.
The difference this year is John has not made enough money to declare a dividend but he has continued to top his salary up to £4,000 a month using his Bounce Back Loan as he thought he could use it for wages.
What John didn’t realise was the Bounce Back Loan could be used for salary but not dividends in most cases.
John’s accountant has just told him that his director’s loan stands at £39,000!!
This means John owes the company £39k and he has not got it to pay.
To make matters worse John’s business has not bounced back and he thinks he may need to speak to an insolvency practitioner about liquidation.
The insolvency practitioner agrees to liquidate John’s business and then promptly asks John to pay the £39k back to the liquidator or he will start legal action against him.
As you can see this is a big problem and many directors could end up in this position if they liquidate.
If you have used your bounce back loan for wages and just getting by and you are considering closing your company, it’s so important you understand your director’s loan position.
Do not leave it to chance and hope that no one will find out, this would be a very costly mistake.
If you want help in understanding your position on this then please let me know and I can help you work it out.
If you do have an overdrawn directors loan account the important thing is to have a plan of how to deal with it and tackle the issue head-on with the insolvency practitioner.
I hope you have found this useful,
All the best,