Using Dividends to Clear a Director’s Loan Account
Using dividends to clear a director’s loan can be an effective way to reduce an overdrawn balance where the company has sufficient distributable profits and the dividend is validly declared.
The accounting entry alone is not enough. The company must have sufficient profits available for distribution, the shareholder must be entitled to the dividend and the correct paperwork should be prepared.
Can a Dividend Be Used to Clear an Overdrawn Director’s Loan?
Yes, potentially. A valid dividend can be credited to the director’s loan account rather than physically paid into the director’s bank account.
HMRC’s Company Taxation Manual confirms that a dividend can be regarded as paid where it is credited to a shareholder’s loan account and is unreservedly placed at the shareholder’s disposal.
The important point is that the dividend must be legally valid. The company cannot simply post a dividend journal because it wants to reduce an overdrawn director’s loan.
The Company Must Have Profits Available for Distribution
A dividend cannot simply be created because the director owes the company money.
UK company law requires a distribution to be made from profits available for the purpose. In broad terms, this means accumulated realised profits after accumulated realised losses.
The company should therefore review its financial position before declaring a dividend.
A Company Can Have Cash but Still Be Unable to Pay a Dividend
The company’s bank balance is not the test for whether a dividend can be declared.
£50,000 in the Bank
The company may have cash because of loans, VAT collected, unpaid suppliers or other liabilities.
Distributable Reserves
The dividend decision depends on available distributable profits, not simply how much money is sitting in the bank account.
Review the Accounts First
Reliable accounting records should support the dividend before it is credited to the director’s loan account.
A Valid Dividend Needs Proper Documentation
GOV.UK states that directors should formally declare the dividend and keep appropriate records.
Review Available Profits
Confirm the company has sufficient distributable reserves.
Declare the Dividend
Follow the company’s articles and decision-making procedure.
Prepare Minutes
Record the directors’ decision or other required approval.
Prepare Dividend Voucher
Record the date, company, shareholder and amount of dividend.
Credit the Loan Account
Apply the valid dividend against the amount owed by the shareholder.
Record Personal Tax
The shareholder may need to report the dividend personally.
The Director Must Have the Relevant Shareholder Entitlement
Dividends arise from share ownership rather than from being a director.
The rights attached to the shares should therefore be considered, particularly where the company has more than one shareholder or more than one class of shares.
A dividend used to clear one director’s loan should not ignore the rights of other shareholders.
Can You Declare a Dividend Only for the Director Who Owes Money?
This depends on the rights attached to the company’s shares.
Simple Structure
Where the director owns all the ordinary shares, the dividend position may be relatively straightforward, subject to available profits.
Rights Must Be Considered
Shareholders within the same class will generally have rights determined by the shares they hold.
Review the Articles
Different share classes can carry different dividend rights and should be reviewed before declaring distributions.
Clearing the DLA Does Not Mean the Dividend Is Tax-Free
Crediting a dividend to the director’s loan account can clear or reduce the company debt, but the shareholder has still received a dividend for tax purposes.
The dividend can therefore form part of the shareholder’s taxable dividend income for the relevant tax year.
The personal tax position should be considered before choosing dividends as the repayment method.
A valid dividend credited against an overdrawn director’s loan can affect the amount remaining outstanding for section 455 purposes.
Can a Dividend Prevent an s455 Charge?
Potentially, depending on when the valid dividend is credited and the amount of the loan it clears.
Where the loan is reduced within the relevant post-year-end period, the amount of s455 ultimately payable can be affected.
CT600A reporting can still be required where the loan existed at the accounting period end.
Read our s455 Corporation Tax guide →Clearing Part of a Director’s Loan With a Dividend
The dividend itself can create personal tax, and any remaining director’s loan still needs to be reviewed for s455 and beneficial-loan issues.
What If the Company Does Not Have Enough Profit?
A dividend paid without sufficient available profits can be unlawful.
The Insolvency Service warns that dividends should only be paid from available profits and that unlawful distributions can have serious consequences.
In some circumstances the amount may effectively remain due from the director or shareholder rather than successfully clearing the DLA.
Interim and Final Dividends
The legal mechanics can differ depending on the type of dividend and the company’s articles.
Interim Dividend
Often paid by directors during the year, subject to the company’s articles and available profits.
Final Dividend
May be declared in accordance with the company’s articles and relevant approval process.
Dividend-to-DLA Checklist
Dividend vs Cash Repayment vs Salary
Cash Repayment
Director physically repays funds to the company.
Main consideration Requires personal cash to be available.Dividend Credit
Valid dividend is credited against the amount owed.
Main consideration Requires distributable profits and can create personal dividend tax.Salary or Bonus
Remuneration is processed and credited against the DLA.
Main consideration PAYE and National Insurance may arise.Related Director’s Loan Guides
Dividend Planning Connects With Accounts, Tax & Payroll
A dividend used to clear a director’s loan should be considered alongside company profits, statutory accounts, personal taxation and Corporation Tax.
Dividends & Director’s Loan Resources
Using Dividends to Clear a Director’s Loan FAQs
Can I use a dividend to clear my director’s loan?
Potentially yes. A valid dividend can be credited against the director’s loan where the company has sufficient distributable profits and the dividend is properly declared.
Does the company need cash to declare the dividend?
The key legal test is available distributable profits, not simply the bank balance. Crediting a dividend to a loan account may not require an immediate cash payment.
Does the dividend need to be physically paid to me first?
Not necessarily. HMRC accepts that a dividend can be paid where it is credited to a shareholder’s loan account and placed unreservedly at the shareholder’s disposal.
What paperwork is needed?
The company should follow the appropriate declaration procedure, retain minutes and prepare a dividend voucher showing the relevant company, shareholder, date and amount.
What if the company does not have enough profit?
A dividend should not be declared beyond the company’s available distributable profits. Unsupported or unlawful dividends can create further problems rather than properly clearing the loan.
Does using a dividend avoid personal tax?
No. Crediting the dividend against the DLA can reduce the company debt, but the shareholder can still have personal dividend income for tax purposes.
Can a dividend reduce s455 Corporation Tax?
A valid dividend credited against the loan can potentially reduce the amount outstanding for s455 purposes, depending on timing and the detailed circumstances.
Can I declare a dividend only to one director?
Dividends are paid according to shareholder rights, not simply director status. The company’s share structure and articles should therefore be reviewed.
Is a dividend better than repaying the loan in cash?
It depends on the company’s distributable profits, the director’s personal cash position, dividend tax and the wider s455 position.
Check the Profits Before Posting the Dividend
Tell us the director’s loan balance, company year end, retained profits and dividends already declared during the period.
Tell Us About the Company Position
A few details will help us assess whether a dividend could appropriately reduce the loan account.