To understand overdrawn director loan accounts, we first need to cover why they exist.
The situation arises most regularly in owner managed businesses where the business owner has been advised that the best way to minimise the tax burden is to draw a minimum salary (£7,020 in 2011/12), and take any further amounts due in dividends.
To declare a dividend, one of the requirements of the Companies Act is that the company has sufficient “reserves” to do so.
“Reserves” in a small business can be defined in one of two ways:
1. The accumulated profit in the ...