1st March 2024
What is a Director’s Loan Account?
A director’s loan account (DLA) is defined as funds a director either deposits or takes from the company that isn’t a business expense, salary or dividends. It acts as a record of everything that has been paid in or out of the company by the director. This means that a DLA can go either way, the company owing the director or the director owing the company.
Director’s loans are very flexible which makes them an attractive option for director’s when they need cash quick. However, it is essential that people are aware of the implications and rules of a director’s loan as it can attract high levels of tax if it does not comply with HMRC’s parameters.
Any personal expenses that are paid directly through the company bank account will be treated as if you are drawing money out of the business and therefore will be shown as money that the director owes to the company within the DLA.
Director’s Loan Account – Company owes the director.
If you are a director and have transferred any monies into your company account or paid for business expenses from your personal account, this will create a balance that the company owes to you. You can draw down on this balance without any tax implications or reporting requirements.
You can choose to charge interest on the balance that the company owes you at the HMRC official rate of 2.25% for the 2023/24 tax year. (2.00% for 2022/23)
If you do charge interest, this is a business expense for your company and personal income for you that will need to be reported on your Self-Assessment tax return. The company must pay you the interest less income tax at the basic rate of 20% and then report and pay the income tax held every quarter using a CT61 form. This can be requested from the GOV.UK website.
Director’s Loan Account – Director owes the company.
If you draw more monies than the company owes to you, this will put your balance in credit and could potentially create tax issues.
If your DLA is overdrawn at your company’s year end, you will need to pay tax on this however if the overdrawn amount is paid back within 9 months and 1 day after the year end, then no tax will need to be paid.
Any amounts that are not paid back within this period will be subject to additional Corporation tax, also know as S455 tax. This is charged at the higher dividend rate of 33.75% (2023/24 tax year) and will need to be paid by the company. This extra tax is repayable to the company by HMRC once the loan has been repaid to the company from the director or if the loan is written off.
If the loan is not repaid and written off by the company, then the director will have to include this on their personal tax return and pay tax on this at 33.75%.
A further implication of an overdrawn DLA is that if you owe your company over £10,000 (interest-free) at any time, the total amount will be classed as a benefit in kind, and you will need to record this at the end of the tax year using a P11d form. The benefit in kind will be liable to both personal and company tax with the company paying Class 1A National Insurances at the rate of 13.8% (2023/24 tax year). The director will be taxed on the interest that would be due if it had been a normal loan on the open market.
For any further information on Directors Loan Accounts, please contact us on 01903 300230.