A directors loan account and how it works
If you run your own company you may have heard the words ‘directors loan account’ being mentioned. Directors loan accounts (DLA) are one of those bits of tax legislation that you really do need to know about.
We have got all the information here on how to benefit from the government guidelines on DLA’s with as little jargon as possible.
What are directors loan accounts?
The director’s account is a virtual account that exists only in your accounting records as a way of keeping a tally of the flow of money between you as an individual and the limited company. As the name suggests you need to be a director of a company to have a directors loan account.
Unlike a sole trader, when you set up a limited company, the company is treated as a separate legal entity and the money in the company does not belong to you. However, there are various ways that you can take this money out and the director’s loan account keeps track of who owes what.
Taking money out
When you take money out of the company that is not a loan repayment, expense repayment, salary or dividend, then you are borrowing from the company via the DLA. This might be personal spending on the business bank account, withdrawing cash for personal use or transferring money to your personal bank account.
What to bear in mind when borrowing via your DLA
More than £10,000 - If the DLA is overdrawn by more than £10,000 then it is classed as a benefit in kind because you are getting a loan and not paying any interest. This needs to be declared on a p11d prepared for the company and on your personal tax return, you will have to pay income tax on this benefit in kind. Alternatively, you can pay interest on the money borrowed and the loan is no longer a benefit in kind.
You owe the company money at year-end – Dividends are paid out of reserves and are a return on investment, these are paid after corporation tax (You do not get a corporation tax deduction on dividend payments). When a directors loan account is outstanding at the year end end it can be deemed as paid by a dividend declaration, however you must ensure there is enough profit left over after tax to settle the account with dividends. If you end up owing money with an overdrawn director’s loan account then you have to declare this on your corporation tax return and there may be tax to pay on it. If you pay back the loan within 9 months and 1 day of the end of your accounting year then there is no tax to pay, if this is not possible then the company will pay 32.5% s455 tax on this loan, this is recoverable after the loan has been repaid.
Borrowing on other’s behalf - As far as HMRC is concerned, the director’s loan also includes what it classes as associates, this means husbands, wives, civil partners, relatives, business partners or investors. Lending to associates gets included in your DLA.
Putting money in
Money that you loan your company gets recorded in the DLA. Also, any money you spend personally on behalf of the company (business expense) is recorded as due to you in the DLA. Once the payment is made from the company for the expenses the previous credit entry in the DLA will be cancelled out.
Why would I need a DLA?
There are many reasons why you might need to take a loan from your company, for example covering unexpected repair costs, or even paying for a holiday.
The important thing to remember is that the loan hasn’t been subject to either personal or company tax and HMRC is going to want what’s due. To fully understand the tax implications of DLA transactions speak to one of our team of accountants.
What happens if I owe my company money?
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind and you’ll need to record it on a P11D, as it’ll be liable to both personal and company tax. You’ll also need to pay Class 1A National Insurance on the full amount.
What happens if my company owes me money?
Your company doesn’t pay any Corporation Tax on money you personally lend it and you can withdraw the full amount from the company at any time, whether the company is in profit or not. If you charge any interest on the loan, it will be viewed as a business expense for your company and personal income for you. There are detailed rules about the timings of repayments and any interest charged or received, with good tax planning this can result in overall tax benefit for both the company and the director.
How do I set up a directors loan?
This is something your accountant will do for you. Discuss with your accountant your needs and the record of business transactions. They will be able to advise you on the finer detail of how to best use your DLA.
Call to speak to one of our team of accountants for more details of how a DLA could work for your business.