Directors, and shareholders are able to use a debit loan if their business is doing well enough and can pass a liquidity test and solvency test after the loan. But some steps need to be taken to get rid of the debit loan after it has been made.
A quick reminder
“A debit loan is any amount of money that is lent by the business to a shareholder or director of the company. This is any form of payment from the company account for a personal asset or experience for a director or shareholder. This means that personal payments via the company card are classified as a debit loan”– Smith and Rossi
Here are three ways to reduce a debit loan
1) Pay it back
This first option is the obvious and easiest choice. The shareholder or director can pay back the amount of money to the business and the loan will be reduced and paid back.
2) Declare a higher salary
Do not misunderstand, the higher salary does not go into the pocket of the director or shareholder to whom the loan has been made. The individual gets the same salary but the difference is technically paying off the loan month by month without a pinch on the individual’s pocket. There is a downside though, if the salary falls into a higher tax bracket, the individual might end up paying higher tax for money they are not getting into pocket.
3) Declare a dividend
Once again, the company needs to be in a position in which they can declare a dividend. This means that the shareholder who received the loan will essentially pay back the loan through their dividend and once again not feel the pinch. Noteworthy: The tax on the dividend will be 20%.
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