I have a client that started a Ltd Co last July. She incurred business expenditure from last March and as she did not have a business bank account set up, used her personal account. She kept all the receipts so I entered the transactions under "Old Bank Account' on Sage. This account is showing overdrawn and cannot be reconciled as it has personal expenditure also. She has since opened a business account and all expenditure is now going through that and I can reconcile it to Sage. The query I have is that she is paying herself a salary of £550 per month to avoid tax and NI and anything over that I was going to put on accounts as dividends. I then thought that why dont I just transfer the extra to the 'old bank account' on sage as it is reimbursement of expenses that she is entitled to. I have a dispensation in place so I presume that is ok? Once the 'old bank account' is cleared then anything over £550 per month will have to be dividends. Does this sound right??? Any feedback would be much appreciated as I'm not sure if this is correct!!
You need to set up a Directors Loan Account, in the Capital section 3xxx, and journal Dr bank CR Directors Loan a/c.
That way there is a record of the debt to the director. I tend to us the bank account when ever a director makes a payment from personal funds, and do a regular journal entry to adjust the DLA
Lovely, thanks so I was on on the right track and just need to neaten it up by transferring to loan? This is brilliant, my client will be happy!! I take it that this would not be possible if I didnt have the dispensation?
With regard to the DLA, in my case the clients prefer a transfer of dividend payments into the DLA, and they draw out of when they need to but leave it in to help cash flow. They always leave it in credit so there is no problems with reporting an overdrawn directors loan account.
The only thing to watch, is the issueing of dividends during the year because there must be sufficient profit for divis to be paid. I also believe that there is a view that paying dividends on a short (monthly) regular basis may be deemed salary rather than dividends.
It is not an area where I have any strong expertise, so others may expand on that.
to add to Bills comments above - each time a dividend is issued you will need the paperwork to back it up - this will be required absolutely every time - I would look into drawing from loan each month rather than dividend and every quarter/6 months pull reports as proof of profit - then issue a dividend.
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Donna Curling - Complete Book-Keeping Ltd (CBKLtd) - 07939 101900
The dispensation is for reimbursing business expenses incurred by director so I dont have to complete P11D at the end of the year.
Forgive me for being thick but why are the repayments to the directors loan dividends? I thought they would be a transfer between two accounts as tax code T9?
Not sure why the repayments from business curent account each month to repay directors loan account have to be dividends? I am trying to avoid the tax on dividends (Corporation Tax on profit) that is why the director wants the loan repaid in full before we go down the dividend route - so I am obviously missing something?
Paying back a DLA that has a credit balance from the bank is fine
Start with creating the Directors Expenses bank account and Directors Loan account
Pay out the expenses from expenses bank account
Journal DR expenses bank Cr DLA (this clears the expenses bank account and creates a credit balance on the DLA)
Make payments from the normal current account to the DLA. This will reduce the "loan"
When divis are to be paid Journal DR the code set up for divis (from memory 32xx range, and Cr DLA
This way when ever the director wants to withdraw funds make a payment from the current account (default 1200). As long as the DLA stays in credit it does not have benefit implications.
You could skip the first two items and just do a journal Dr expenses Cr DLA but I prefer to use a dummy bank account to handle all director expense payments, then do regular (usually monthly but could be quarterly, yearly) journals between the directors bank a/c and the DLA
