Understanding – And Using – a Director’s Loan Account
If you own a business, you’ve probably come across the term “directors loan account.” Directors loan accounts (DLA) are one of the many tax provisions that you should be familiar with when you start a business of your own. That’s especially true of DLAs, as, if done right, they can offer you personally some significant financial benefits.
What is a Directors Loan Account?
A director’s loan account is not a real bank account, it exists only in your accounting records to keep track of the money flowing between you and the limited company. A directors loan account requires you to be a director of a company, as the name implies.
When you form a limited company, unlike when you operate as a sole trader, the company is treated as a separate legal entity, and the money in the company does not legally belong to you. You can withdraw this money in a variety of ways, and the director’s loan account keeps track of who owes what.
You are borrowing from the company via the DLA when you take money out of the company that is not a loan repayment, expense repayment, salary, or dividend. Personal spending from the business bank account, cash withdrawals for personal use, or money transfers to your personal bank account are examples of this.
Putting Money Into Your Business
The DLA is also used to keep track of any money you lend to your company. In addition, any money you spend on behalf of the company (business expenses) is recorded in the DLA as owing to you. The previous credit entry in the DLA will be cancelled once the company makes payment for the expenses.
What To Keep In Mind About Directors Loan Accounts and Taking Money Out of Your Business
Too Much Becomes a Benefit in Kind
If your DLA account is overdrawn by more than £10,000, it’s considered a benefit in kind because you’re getting a loan with no interest. This must be declared on a p11d prepared by the company, and you must pay income tax on this benefit in kind on your personal tax return. To avoid this, you could pay interest on the money you have borrowed, in which case the loan is no longer a benefit in kind.
You May Owe the Company Money at Years’ End
Dividends are paid from reserves as a return on investment, and they are paid after corporation tax. A dividend declaration can be used to settle a directors loan account that is still outstanding at the end of the year, but you must ensure that there is enough profit left over after taxes to settle the account with dividends. If you have an overdrawn director’s loan account and owe money, you must report it on your corporation tax return, and you may have to pay tax on it.
There is no tax to pay if you repay the loan within 9 months and 1 day of the end of your accounting year; if this is not possible, the company must pay 32.5 percent s455 tax on the loan, which is recoverable after the loan is repaid.
And by the way, The director’s loan includes what HMRC classifies as associates, which includes husbands, wives, civil partners, relatives, business partners, and investors.
Why Would I Need a Directors Loan Account?
There are a variety of reasons why you might need a loan from your company, such as unexpected repair costs or even paying for a personal holiday trip.
The most important thing to remember is that the loan was not subject to personal or corporate tax, and HMRC does demand what is due!
What happens if I owe money to my company?
If you owe your company more than £10,000 (interest-free) at any time, the loan is considered a benefit in kind, and you’ll need to report it on a P11D because it’ll be subject to both personal and corporate tax. On top of that, you’ll have to pay Class 1A National Insurance on the entire amount.
What if my business owes me money?
Your company does not pay Corporation Tax on money you personally lend it, and you can withdraw the entire amount at any time, regardless of whether the company is profitable or not.
If you charge interest on the loan, it will be considered a business expense for the firm and personal income for you. There are specific rules governing the timing of repayments and any interest charged or received, which can result in a tax benefit for both the company and the director, with careful tax planning.
How Do I Set Up a DLA?
Setting up – and then properly paying back – a DLA is something that should be left to an accountant, to avoid tax hassles for you or your company. Don’t have one yet? For more information on how a DLA could benefit your company, contact us here.