What is a director’s loan account? If you’re not sure, and you run a limited company, then this is definitely something you’ll need to familiarise yourself with. Even if you have a bookkeeper or accountant who takes care of ‘all that stuff’, it is useful to be aware of the most important pieces of tax legislation so that you are well-prepared to avoid any unintentional hiccups.
Our overview guide to the director’s loan account (DLA) will help you do just that, without any technical jargon involved.
What is a director’s loan account?
The money earned by your limited company is not technically the property of the directors. However, directors are able to access it via a director’s loan.
HMRC describes a director’s loan as money taken from a limited company that is not a salary, dividend or expense repayment, or that is not money you have previously paid into or loaned to the company.
This means that, if you take money out of your company for anything other than the above, it must be recorded in your director’s loan account. When it comes to the end of your financial year, the company will either owe you money, or you will owe the company money, the status of which will be recorded as a liability or an asset on your annual accounts balance sheet.
What transactions should be recorded in the director’s loan account?
If you make any cash withdrawals as a director, then you should record these in your DLA. In addition, you must record any personal expenses which were paid for with company funds.
Your DLA must show evidence of all transactions involving personal finances in addition to those of your company. It is crucial that your DLA is maintained accurately, because HMRC will review it via your annual corporation tax returns.
Who is able to take a director’s loan and what can they be used for?
Directors’ loans can only be taken by the directors of a limited company.
They can be used to cover emergency expenses such as needing to replace a home appliance, or even for a wedding.
The key thing to remember is that the loan is made without taxation, which means HMRC will want anything that is due.
Do I have to pay tax on a director’s loan?
If when your company year-end comes around there is a balance owing to the DLA, then you may need to pay tax. If you are able to repay the loan in its entirety within nine months of the year-end, then no tax will be due. If not, then corporation tax will be payable at the prevailing rate.
If you owe your company more than £10,000 net of interest at any point in time, then the loan will be classed as a benefit in kind and will need to be recorded on a P11D. It will be liable for both company and personal tax as well as National Insurance, all at the prevailing rates.
If the company owes you money then it will not need to pay any corporation tax on the loan. You can withdraw the money at any time. If you have charged interest on the loan you have made to the company, then this will be classed as a business expense for the company and personal income for you which must be declared on your Self-Assessment tax return.
If you have borrowed more than £10,000 from your company and then repay it, you may not withdraw any further funds over this amount until 30 days have elapsed.
If your company writes off a director’s loan then there are tax implications that need to be taken into consideration. Professional advice is absolutely vital in this respect.
HMRC monitors directors’ loan accounts, especially those that are regularly overdrawn. If they decide that the loan is being used as a salary, then they will demand that Income Tax and National Insurance are paid.
You are well advised to seek professional guidance on any matter concerning tax. It is a complex area and one that is regularly changing.
Should you require assistance with the bookkeeping and accounting side of your limited company, we’d be delighted to hear from you.