The directors current account (DCA) (also known as simply directors account) is a notional balance between a company and its directors. It is – of course – not a real bank account, and is not represented by real money. It records:
- Monies drawn by the director, on account of salary, dividends, expenses, etc (if not attributed to salary/dividend at the time of drawing)
- Other drawings by the director – eg personal bills paid by the company.
- Net amounts of salary and dividend due.
- Expense re-reimbursements due
Normally a directors account must be kept in credit – that’s to say that amounts brought forward, plus net salary and dividend, plus expense re-reimbursements must be more than the amounts drawn. This balance can normally be achieved by adjusting the year end dividend level. When the directors account is in credit, it is a credit balance on the accounts, and shows as a creditor – that’s to say an amount owed by the company to the director.
However dividends cannot exceed retained profit, and if there is insufficient profit to declare a dividend to cover the directors account then the directors account will be “overdrawn” that’s to say more will have been taken out than you are entitled to take out. In such cases the balance is a debtor in the company accounts, that’s to say an amount owed to the company by the director.
An overdrawn directors account has a number of connotations.
- First, it is illegal under the Companies Act – in reality so long as the company does not become insolvent and cease to trade there will be no comeback from this as, unless the company is insolvent, the only people who are wronged by the overdrawn directors account are the shareholders, i.e. the directors in another guise.
- Secondly, and more seriously, an overdrawn directors account is subject to a 32.5% Corporation Tax surcharge, referred to as S455. S455 is an unusual tax charge in so far as it is a temporary liability, and the amount is repaid when the directors loan account is written off or repaid – think of it as a security deposit to HMRC guaranteeing that the overdrawn balance will be corrected.
- Finally, there is a benefit in kind charge on the notional interest forgone on the loan – and this is subject to personal tax at 20%, 40% or even 45% as applicable, plus Employers NI at 13.8%.
Therefore overdrawn directors accounts are best avoided. For a PSC this is quite simple; so long as all tax liabilities are provided for in a bank account in the company name as they build up then an overdrawn directors account is unlikely to arise. By contrast if tax is not provided as money is earned then at the year end there is a strong chance that there will not be enough assets in the company, leaving the directors account overdrawn.